Inside job : the looting of America's savings and loans

is the All The President's Men of the savings
and loan crisis." —Jack Anderson

\

)

ericas

'r'^A

STEPHEN PIZZO,

MARY PRICKER and

. PAUL MUOLO

ISBN 0-07-050530-7 >$n-T5

IN$IDE JOB

The Looting of ^
America 's Savings and Loans

by Stephen Pizzo,

Mary Fricker and

Paul Muolo

It's the biggest heist in U.S. history-
billions of dollars are missing from the
nation's savings and loans, and no matter
how good one's accountant, it's going to
cost every American taxpayer at least
$1,000.

Inside Job is the compelling story—
until now untold— of where the money
went. In 26 hard-hitting, solidly docu-
mented, and eye-opening chapters, inves-
tigative reporters Stephen Pizzo, Mary
Fricker, and Paul Muolo deliver the
answer: Over a period of seven years,
a greedy network of swindlers, mobsters,
S&L executives, and con men have cap-
italized on regulatory weaknesses created
by deregulation and have thoroughly
fleeced the thrift industry. While it is true
that economic factors (like plummeting
oil prices in Texas and its surrounding
states) have contributed to the crisis, .s(/r-
ings and loans would not be in the condi-
tion they are today but for rampant fiaud.

Read about the financial hit-and-run
fraternity: men like Michael Rapp, the
Mafia's stockbroker: Morris Shenker,
casino owner and former attorney to
Jimmy Hoffa: Herman K. Beebe, the hid-
den power behind 100 S&Ls and banks;
and Mario Renda. tap dancer turned sav-
ings and loan racketeer. When Congress
deregulated S&Ls, one eager executive

{continued on hatkjhip)

INSIDE JOB

Stephen Pizzo, Mary Fricker

and Paul Muolo

INSIDE JOB

The Looting of Americans
Savings ana Loans

McGraw-Hill Publishing Company

New York St. Louis San Francisco
Hamburg Mexico Toronto

The Woody Guthrie lyric on page 240 is used by permission © copyright
1961, 1%2 by Fall River Music, Inc., New York, New York. All rights
reserved.

Copyright © 1989 by Stephen Pizzo, Mary Fricker and Paul Muolo. All
rights reserved. Printed in the United States of America. Except as per-
mitted under the Copyright Act of 1976, no part of this publication may
be reproduced or distributed in any form or by any means or stored in
a data base or retrieval system without the prior written permission of
the publisher.

7 8 9 DOC DOC 9 2 10

ISBN D-D7-DS0E3Q-7

Library of Congress Cataloging-in-Publication Data

Pizzo, Stephen.

Inside job : the looting of America's savings and loans / Stephen
Pizzo, Mary Fricker, and Paul Muolo.
p. cm.

Bibliography; p.

Includes index.

ISBN 0-07-050230-7

1. Building and loan associations — United States. 2. Building and
loan associations — United States — Deregulation. I. Fricker, Mary.
II. Muolo, Paul. III. Title.

HG2151.P59 1989 89-12519

332.3'2'0973— dc20 GIF

Book design by Sheree Goodman

Contents

Dramatis Personae ix

Introduction: Original Sin 1

1. A Short History Lesson 9

2. Shades of Gray 16

3. Centennial Gears Up for Deregulation 25

4. $10,000 in a Boot 38

5. The Downhill Slide 49

6. Lazarus 61

7. Back in Washington 77

8. Tap-dancing to Riches 84

9. Buying Deposits 96

10. Renda Meets the Lawyer from Kansas 105

11. The End of the Line 119

12. "Miguel" 127

13. Flushing Gets a Bum Rapp 140

14. Casino Federal 156

15. Gray, Stockman, and the Red Baron 177

16. Going Home 190

17. Dark in the Heart of Texas 202

vi ■

Contents

18.

The Last Squeezing of the Grapes

19.

The Godfather

20.

Beebe Gets Caged

21.

Round Three

22.

A Thumb in the Dike

23.

The Touchables

24.

Friends in High Places

25.

What Happened?

26.

Taking the Cure

Epilogue

Endnotes

Glossary

220
230
240
252
263
274
285
298
310
328
332
370

Appendix A: The Comptroller Report on Herman K. Beebe 376
Appendix B: "The Five-Senators Meeting" 392

Source Notes 405

Index 429

Acknowledgments

This book was three years in the making, and more people deserve our gratitude
and thanks than space here allows. First among them are our families: Steve
Pizzo's wife, Susan Pizzo, and sons, Nicholas and Christopher Pizzo; Mary
Pricker's mother, Sibyl Dameron, and sons, Glenn and Scott Fricker; Paul
Muolo's wife, Ann Leger. High also on our list are our agent, Denise Marcil,
and our editors, Tom Miller and Anne Sweeney, who saw the importance of
this book long before the thrift crisis became standard fare on the evening news.
We are certain that had they not embraced this project early on, this book might
never have seen print. In addition, we'd like to extend our thanks to Debra Kass
Orenstein for her insightful and intelligent legal commentary, and to John Carter,
copy editor par excellence. Thanks also to National Thrift News editor (and
thrift guru) Stan Strachan, who patiently endured as two of his reporters were
distracted by this project. Special thanks to all those we could not name in this
book: the U.S. attorneys, FBI agents, federal regulators, and attorneys who, at
risk to their careers, spoke to us and sent us critical documentation because they
believed the public had a right to know what happened. They all know who
they are, and we thank them sincerely. Finally, we want to acknowledge the
fine reporting being done around the country by dozens of good journalists.
Without access to their investigative work, we could not have written this book.

VII

DRAMATIS PERSONAE

Descriptions include only infonnation that is relevant to the stories in this book.

John B. Anderson: California farmer who bought the Dunes Hotel and Casino in
Las Vegas from Morris Shenker in 1984 and put it into bankruptcy in 1985; borrowed
from many S&Ls.

Ottavio A. Angotti: Chairman, Consolidated Savings Bank, Irvine, California.

Frank Annunzio: Democratic congressman from Illinois.

Jack Atkinson: Vernon Savings borrower.

George Aubin: A consultant to Mercury Savings, Witchita Falls, Texas; and Ben
Milan Savings, Cameron, Texas; associate of Herman K. Beebe.

Farhad Azima: Director, Indian Spring State Bank, Kansas City, owner Global
International Airways.

James Baker: White House chief of staff, 1981-1985; treasury secretary, 1985-1989.

Tyrell Barker: Owner, State Savings in Lubbock, Texas, Brownsfield Savings in
Brownsfield, Texas, and Key Savings, Englewood, Colorado.

Doug Barnard: Democratic congressman from Georgia; chairman of the Commerce,
Consumer and Monetary Affairs sub-committee of the House Committee on Gov-
ernment Operations.

Ben Barnes: Lieutenant governor ofTexas 1968-1972; associate of Herman K. Beebe
and John Connally.

Charles Bazarian: Oklahoma loan broker; owner CB Financial.

Gilbert Beall: Borrower from Acadia Savings, Crowley, Louisiana; purchased Po-
conos property from Jilly Rizzo and Anthony Delvecchio.

Herman K. Beebe: Louisiana businessman; owner AMI Inc. and Bossier Bank &

IX

X ■ Dramatis Personae

Trust; subject of 1985 comptroller of the currency report which listed 109 financial
institutions related to Beebe.

Richard Binder: Borrower from Centennial Savings, Guemevillc, California; as-
sociate of David Gonvitz.

William Black: Director of litigation in the FHLBB Office of General Counsel
1984-1986; deputy director, FSLIC, 1986-1987; general counsel, FHLB San Fran-
cisco, beginning in 1987.

Spencer Blain: chairman. Empire Savings, Mesquite, Texas.

Ellis Blount: FBI special agent on the Herman K. Beebe case.

Jack Bona: borrower with Frank Domingues at San Marino Savings, San Marino,
California; purchased Atlantic City Dunes Hotel in 1983.

Douglas Bosco: Democratic congressman from California; borrower from Centen-
nial Savings, Guerneville, California.

L. Linton Bowman: Texas savings and loan commissioner, resigned in 1987.

Joseph Boyer: FBI special agent on the State Savings of Corvallis, Oregon, case.

Eric Bronk: attorney and consultant for Robert Ferrante's Consolidated Savings
Bank, Irvine, California.

Mitchell Brown: owner with E. Morton Hopkins of First National Bank of Marin;
borrower at State Savings of Corvallis, Oregon.

Neil Bush: former director, Silverado Savings, Denver.

Christopher Byrne: senior trial attorney, FDIC.

Joseph Cage: U.S. attorney, Shreveport, Louisiana, on the Herman Beebe and
Acadia Savings cases.

Lance Caldwell: U.S. attorney, Portland, Oregon, on the State Savings/Cor\allis
case.

Carl Cardascia: President, Flushing Federal Savings, New York.

Duayne Christensen: chairman. North American Savings, Santa Ana, California.

James Cirona: president. FHLB San Francisco.

Nick Civella: reputed boss of the Kansas City Mafia family.

Tony Coelho: Democratic congressman from California; chairman House Demo-
cratic Campaign Committee; became House majority whip in 1987.

John Connally: Secretary of the Navy 1961-1962; governor of Texas 1963-1968;
Secretary of the Treasury 1971-1972; candidate for Republican presidential nomi-
nation in 1980; partner with Ben Barnes in the 1980s.

Dramatis Personae • xi

Patrick Connolly: California deputy savings and loan commissioner and, later, ex-
ecutive vice president of Centennial Savings.

Ernie Cooper: FBI special agent on the Centennial Savings case.

Alan Cranston: Democratic senator from California, met with regulators on behalf
of Lincoln Savings, Irvine, California.

William Crawford: California savings and loan commissioner, 1985-present.

Durwood Curiae: Director, Texas Savings and Loan League; later, Texas thrift
lobbyist.

Sam Daily: Associate of Mario Renda in his linked financing scams; Hawaii real
estate broker.

Morris "Moe" Dalitz: Reputed mob associate; owner Desert Inn Hotel and Casino
and Sundance Hotel in Las Vegas; general partner La Costa resort.

Dennis DeConcini: Democratic senator from Arizona; met with regulators on behalf
of Lincoln Savings, Irvine, California.

Anthony Delvecchio: Borrower at Flushing Federal Savings, New York; associate
of Michael Rapp.

Daniel W. DierdorfF: President, Sun Savings, San Diego, California.

John Dioguardi: reputed to be a member of the Lucchese mob family; associate of
Michael Hellerman.

Don Dixon: Controlled Vernon Savings, Vernon, Texas.

Frank J. Domingues: borrower with )ack Bona at San Marino Savings; owner South
Bay Savings, Newport Beach, California.

Edwin Edwards: Louisiana governor 1972-1980, 1984-1988.

Frank Fahrenkopf: chairman Republican National Committee, 1982-1988.

Robert Ferrante: Owner, Consolidated Savings Bank, Irvine, California.

Ed Forde: chairman, San Marino Savings, San Marino, California.

Lorenzo Formato: president. World Wide Ventures; associate of Michael Rapp.

Jack Franks: southern California loan broker.

Jake Gam: Republican senator from Utah; chairman, Senate Banking Committee;
co-author, Garn-St Germain Act.

Thomas Gaubert: Former head and major shareholder, Independent American Sav-
ings, Irving, Texas; treasurer 1986 Democratic Congressional Campaign Committee.

John Glenn: Democratic senator from Ohio; met with regulators on behalf of Lin-
coln Savings, Irvine, California.

xii ■ Dramatis Personae

Henry Gonzalez: Democratic congressman from Texas; chairman House Banking
Committee after St Germain was defeated for re-election in 1988.

David Gorwitz: reputed mob associate; friend of Richard Binder who was a borrower
at Centennial Savings.

Camille Gravel: Louisiana attorney; represented Herman Beebe; close friend of judge
Edmund Reggie.

Edwin J. Gray: Chairman, FHLBB, 1983-1987.

Roy Green: president FHLB Dallas, resigned 1987.

Alan Greenspan: thrift consultant; chairman. Federal Reserve Board.

Mary Grigsby: member FHLBB, 1984-1986.

Beverly Haines: Executive vice president. Centennial Savings, Guemeville, Cali-
fornia.

Craig Hall: Dallas real estate syndicator.

Erwin Hansen: President, Centennial Savings, Guemeville, California.

J.B. Haralson: Owner, Ben Milam Savings, Cameron, Texas, and Mercurv' Savings,
Witchita Falls, Texas; associate of George Aubin.

Richmond Harper: member of the 1970s Rent-a-Bank scandal in Texas and a Ben
Barnes associate.

Michael Hellerman (aka Michael Rapp): Mob's stock broker; borrower. Flushing
Federal Savings, New York; purchased Florida Center Bank with rubber check from
Charles Bazarian.

Lee Henkel: Brief member, FHLBB; associate of John Connally and Charles Keat-
ing.

E. Morton Hopkins: owner. Commodore Savings in Dallas, partner with Mitchell
Brown in First National Bank of Marin in San Rafael, California.

Donald Hovde: member FHLBB, 1983-1986.

Lawrence S. lorizzo: reputed mob associate and associate of Mario Renda.

William Isaac: Chairman, FDIC, 1981-1985.

Norman B. |enson: Las Vegas attorney; casino owner; borrower. Alliance Federal,
Kenner, Louisiana; alleged member international drug smuggling ring.

Charles Keating: Chairman, American Continental Corporation in Phoenix, parent
company of Lincoln Savings, Irvine, California.

|ohn Keilly: Las Vegas loan broker; associate of Norman B. Jenson, Wayne Newton,
Frank Fahrenkopf; did 27 months in prison in 1970s in connection with a union
bribery case.

Dramatis Personae • xiii

Carroll Kelly: owner with David Wylie, Continental Savings, Houston; associate of
Herman K. Beebe.

Murray Kessler: reputed mob associate; involved with a figure in the Texas Rent-a-
Bank scandal in the 1970s.

Adnan Khashoggi: Saudi Arabian middleman, associate of Mario Renda; borrower
from Mainland Savings, Houston, Texas.

Kenneth Kidwell: President, Eureka Federal Savings, San Carlos, California.

Charles Knapp: Former head of Financial Corporation of America, parent company
of American Savings, Stockton, California; the "Red Baron."

Sig Kohnen: a senior officer of Charles Bazarian's CB Financial.

John Lapaglia: loan broker; head of Falcon Financial, San Antonio, Texas.

William Lemaster: President, Indian Springs State Bank, Kansas City.

Woody Lemons: CEO, Vernon Savings.

Donald E. Luna: associate of Herman K. Beebe and Carl Cardascia.

Bruce Maffeo: Assistant U.S. attorney. Organized Crime Strike Force, Brooklyn,
New York, on the First United Fund case.

George Mallick: Fort Worth developer and friend of Speaker of the House Jim
Wright.

Michael Manning: Attorney; fee counsel, FDIC and FSLIC, on the First United
Fund case.

Ed McBimey: Chairman, Sunbelt Savings, Dallas.

John McCain: Republican senator from Arizona; met with regulators on behalf of
Lincoln Savings, Irvine, California.

Ed Meese: U.S. Attorney General, 1985-1988.

John Mmahat: CEO Gulf Federal Savings, Metarie, Louisiana.

Donald P. Mangano: owner, Ramona Savings, Ramona, California.

Scott Mann: chairman CreditBanc Savings, Austin, Texas.

Carlos Marcello: reputed New Orleans Mafia boss.

Ronald J. Martorelli: vice president. Flushing Federal Savings, Flushing, Queens,
New York.

Frederick Mascolo: borrower at Acadia Savings, Crowley, Louisiana; purchased
Poconos property from Rizzo and Delvecchio.

Harvey McLean: director, Paris Savings, Paris, Texas; owner. Palmer National Bank,
Washington, D.C.

xiv • Dramatis Personae

Walter Mitchell, Jr.: Redondo Beach, California, city councilman and associate of
Robert Ferrante.

Ed Mittlestet: president, Charles Bazarian's CB Financial.

John L. Molinaro: owner, Ramona Savings, Ramona, California.

Patrick Murphy: FBI special agent on the Centennial Savings case.

John Napoli, Jr.: convicted of bank fraud in connection with his dealings at Aurora
Bank in Denver; an associate of Michael Rapp.

Tom Nevis: borrowed over $100 million from savings and loans; convicted of bank
fraud at State Savings of Corvallis, Oregon in 1989.

William O'Connell: President, U.S. League of Savings Institutions.

Guy Olano: Chairman, Alliance Federal Savings, Kenner, Louisiana.

J. William Oldenburg: San Francisco loan broker; owner. State Savings, Salt Lake
City.

Michael Patriarca: Director of Agency Group. FHLB San Francisco.

Leonard Pelullo: chairman, Royale Group Ltd; purchased Atlantic City Dunes in
1988.

Gene Phillips: chairman, Southmark Corp.

Salvatore Piga: reputed mob associate and friend of Mario Renda.

Robert Posen: thrift attorney, associate of loan broker John Lapaglia.

Richard Pratt: FHLBB chairman, 1981-1983.

Albert Prevot: PVench businessman from Houston whose testimony led to the in-
dictment of Herman K. Beebe.

G. Wayne Reeder: Southern California developer with connections to Southmark,
Herman Beebe, San Marino Savings, others.

Donald Regan: CEO and chairman of the board, Merrill Lynch, 1975-1981; trea-
sury secretan, 1981-1985; White House chief of staff 1985-1987.

Edmund Reggie: Louisiana judge; founder and director, .Acadia Savings, Crowley,
Louisiana: associate of Herman Beebe.

Lionel Reifler: Associate of Michael Rapp; borrower at Acadia Savings in Crowley,
Louisiana.

Mario Renda: Deposit broker; owner First United Fund, Garden City, New York.

John Riddle: Vernon Savings borrower.

Don Riegle: Democratic senator from Michigan; met with regulators on behalf of
Lincoln Savings, Irvine, California; later returned contributions from Lincoln.

Dramatis Personae • xv

Jilly Rizzo: Borrower. Flushing Federal Savings; assoeiate of Michael Rapp, and
elose friend and bodyguard to Frank Sinatra.

Peter Robinson: Assistant U.S. attorney, Santa Rosa, California, on the Centennial
Savings case.

Stuart Root: head, FSLIC.

Heinrich Rupp: Borrower. Aurora Bank. Denver; claimed to be CIA contract pilot;
associate of Michael Rapp.

Anthony Russo: Vice president, hidian Springs State Bank, Kansas City.

Richard Sanchez: supervisor. FHLB San Francisco.

Nicholaas Sandmann: Dutch investor; borrower and stockholder. Centennial Sav-
ings, Guerneville, California.

Philip B. Schwab: Owner, Cuyahoga Wrecking Company, Great Neck, New York;
owner. Players Casino, Reno.

Martin Schwimmer: Financial advisor. First United Fund, Garden City, New York.

Joe Selby: Chief supervisory agent, FHLB Dallas.

Siddharth Shah: Executive vice president. Centennial Savings, Guerneville, Cali-
fornia.

Morris Shenker: Owner, Dunes Hotel and Casino, Las Vegas, until 1984; former
attorney for Teamster boss Jimmy Hoffa.

William Smith: associate of Michael Rapp; claimed to be former CIA agent.

Leif and Jay Soderling: owners. Golden Pacific Savings, Windsor, California.

Rosemary Stewart: head, enforcement division, FHLBB.

Femand St Germain: Democratic congressman from Rhode Island; chairman. House
Banking Committee; co-author, Garn-St Germain Act.

David Stockman: director. Office of Management and Budget, 1981-1985.

Larry Taggart: California S&L commissioner 1983-1985.

R.B. Tanner: founder, Vernon Savings, Vernon, Texas.

Laurence B. Vineyard, Jr.: attorney for Brownfieid Savings, Brownfield, Texas;
owner with Tyrell Barker of Key Savings, Englewood, Colorado.

Paul Volcker: chairman. Federal Reserve Board, 1979-1987.

M. Danny Wall: Sen. Jake Garn's aide until 1985; became FHLBB chairman in

1987.

Bruce West: Vernon Savings borrower.

xvi • Dramatis Personae

Chuck Wilson: owner, Sandia Savings, Albuquerque, New Mexico.

Franklin Winkler: Associate with Mario Renda in linked financing scams; Hawaii
real estate develof)er.

V. Leslie Winkler: International con man and associate of Mario Renda.

Jarrett Woods: owner. Western Savings, Dallas.

Jim Wright: Democratic congressman from Texas; became Speaker of the House
January 1987.

E)avid Wylie: owner with Carroll Kelly, Continental Savings, Houston; associate of
Herman K. Beebe.

Al Yarbrow: Beverly Hills loan broker.

INTRODUCTION

Original Sin

President Ronald Reagan stepped through the tall French doors of the White
House Oval Office into the bright sunlight of a lovely fall morning. Whispers
and nudges rippled through the crowd, and a hush fell over the Rose Garden.
A squad of Secret Service agents melted into the audience as Reagan, smiling
broadly, strode across the lawn to the podium.

The president stood at ease for a moment and looked out over the assembled
guests, beaming with pride and satisfaction. He had promised the American
people that he would get government off their backs, that he would deregulate
the private sector. This day, October 15, 1982, less than two years into his
presidency, he had invited 200 people to witness the signing of one of his
administration's major pieces of deregulation legislation.

Reagan told the audience of savings and loan executives, bankers, congress-
men, and journalists that they were there to take a major step toward the de-
regulation of America's financial institutions. He was about to sign, he said, the
Garn-St Germain Act of 1982, which would cut savings and loans loose from
the tight girdle of old-fashioned, restrictive federal regulations. For 50 years
American families had relied on savings and loans to finance their homes, but
outmoded regulations left over from the era of the Great Depression, Reagan
believed, were preventing thrifts from competing in the complex, sophi.sticated
financial marketplace of the 1980s. The Garn-St Germain bill would fix all that,
he promised.

At the conclusion of his remarks, and following enthusiastic applause, Rea-
gan took his seat at a table surrounded by the bill's proud political parents. He
flashed a broad smile for the cameras and launched into the signing process.
With each sweep of a souvenir pen, thrift regulations crumbled. It was an
exhilarating moment for Ronald Reagan. The bill was "the most important

2 ■ INSIDE JOB

legislation for financial institutions in 50 years," he said. It would mean more
housing, more jobs and growth for the economy.

"All in all" — he beamed — "I think we've hit the jackpot."

Less than four years later, at the lavish Dunes Hotel and Casino in Las
Vegas, Ronald Reagan's words could well have served as the chorus to Ed
McBirney's company song.

Ed McBirney was the fun-loving 33-year-old chairman of Sunbelt Savings
and Loan, one of Dallas's largest S&Ls with nearly $3 billion in assets. He was
playing host at one of his periodic parties in his plush penthouse suite at the
Las Vegas Dunes. One of the guests later described the party: McBirnc> smiled
slyly as he surveyed his guests. Slouched on the floor against a couch, he puffed
on a large cigar as Sunbelt executives and customers, whom he had flown from
Dallas to Las Vegas on a private 727 jet, mingled and chatted, enjoying predinner
cocktails and hors d'oeuvres on Sunbelt's tab. McBirney seemed to enjoy living
up to his reputation as an outrageous swinger who conducted business deals
between, and during, parties, and entertainment had been secretly arranged
tonight that promised to be . . . interesting.

He glanced toward the door as it opened. Four attractive, well-dressed women
entered the room full of men. The buzz of conversation paused as McBirney's
guests noticed the new arrivals. They watched expectantly, curiously, as the
women smiled seductively and drifted quietly to prominent positions in the room.
Suddenly, without explanation, they began to undress.

The savings and loan guests, well aware of McBirney's reputation, were only
momentarily surprised. Then they settled back to enjoy the show. They did
assume, however, that once the women were naked, the entertainment would
end. They were wrong. When the women finished undressing they mo\ed toward
the center of the room and engaged in an enthusiastic lesbian romp. The all-
male audience did some embarrassed shuffling, but for the most part they went
along for the ride. After the lesbian routine the girls separated and moved among
the guests, many of whom were still frozen in amazement. Targeting the older
members of the audience, the women began performing oral sex on them while
McBirney, sitting on the floor, grinned widely and puffed on his cigar.

McBirney was skillfully riding a cresting wave of power, and he certainly
must have felt like he had hit the jackpot, though it was not quite the one
President Reagan had had in mind that morning in the Rose Garden. But just
four months after the March 1986 party in Las Vegas, McBirney would be forced
to resign from Sunbelt, and he would leave the institution hopelessly insolvent.
When the dust finally settled regulators would say Sunbelt's cash drawer was
$500 million short. Worse yet, the cost of playing out the thrift's losing hand
would be $1.7 billion. Quite a jackpot.

McBirney, and dozens like him, were a new breed of savings and loan
executive that had sprung like weeds out of the rich soil of the October 1982 Rose

Introduction: Original Sin • 3

Garden ceremony. At first no one quite knew what to make of these flamboyant
new "entrepreneurs." They were very different from the old traditional thrift
officers, but wasn't that precisely the point of deregulating the thrift industry —
to attract the best and brightest from America's private sector and give them free
rein to work capitalism's magic on an industry clogged with dead wood? Wall
Street's wunderkind, arbitrager/financier Ivan F. Boesky, acquired a small upstate
New York thrift. Then-Vice President George Bush's son Neil became director
of Silverado Savings in Denver. New York Governor Mario Cuomo's son Andrew
tried to purchase Financial Security Savings in Delray Beach, Florida. Former
Governor of Illinois Dan Walker acquired First American Savings in Oak Brook,
Illinois. Surely, people thought, if men of such stature wanted to own savings
and loans, the industry must be headed in the right direction.'

But only 18 months after the Rose Garden signing, Edwin Gray, chairman
of the Federal Home Loan Bank Board (FHLBB),- discovered something had
gone very wrong. On March 14, 1984, he received in the morning dispatch a
classified report and videotape from the Dallas Federal Home Loan Bank. Gray
summoned fellow Bank Board members Mary Grigsby and Donald I. Hovde to
a darkened meeting room on the sixth floor of the Bank Board building, just
down the block from the White House, to view the tape. Gray, in his late forties,
a solid but tired-looking man with graying hair, sat at the head of the conference
table. Microphones recorded the moment for history. In the dimly lit room, a
videotape began to roll.

Gray, Grigsby, and Hovde watched in rapt horror. The narrator, a Dallas
appraiser, appeared to be in the passenger seat of a car driving along Interstate
30 on the distant outskirts of east Dallas. The camera panned slowly from side
to side, catching in sickening detail the carrion of dead savings and loan deals:
thousands of condominium units financed by Empire Savings and Loan of
Mesquite, Texas. The condominiums stretched as far as the camera could see,
in two- and three-floor clusters, maybe 1 5 units per building. They were separated
by stretches of arid, flat land. Many were only half-finished shells. Most were
abandoned, left to the ravages of the hot Texas sun. Like a documentary film,
the camera zoomed in on building materials stacked rotting in the desert dust.
Loose wiring and shreds of insulation swayed in the warm, dead, quiet air.
Siding had warped, concrete cracked, windows broken. In many cases only the
concrete slab foundations remained — "Martian landing pads," a U.S. attorney
would later call them.

"I sat in that board meeting," Gray said later, "and I was so shocked and
stunned at what I was seeing that it had a profound effect on me. It was like
watching a Triple X movie. I was sick after watching it. I could not believe that
anything so bad could have happened."

Empire Savings and Loan had rocketed gleefully into the newly deregulated
thrift universe in apparent disregard of the ethical and legal implications of its

4 • INSIDE lOB

wild ways, growing seventeen-fold in two years. Later the Federal Savings and
Loan Insurance Corporation (FSLIC) would charge that Empire's officers had
"sold" land back and forth with associates, to make it look like the land was
increasing in value, in order to justify huge loans from Empire Savings for the
condominium projects along the 1-30 corridor. They seemed to have completely
ignored cautions normally taken by prudent thrifts to ensure the safety and
security of money entrusted to them by their depositors. And now the savings
and loan was not only broke but deeply in the red.

The Bank Board closed Empire Savings that very day and about a year later
the federal government would file both civil and criminal charges against over
100 companies and individuals involved in Empire's collapse.' In the end the
Empire case alone would cost the FSLIC"' about $300 million. But Empire,
costly as it was, represented just the first small hint of the financial holocaust
to come. Deregulation of savings and loans sparked a period of waste and cor-
ruption, excess and debauchery the likes of which the nation had not seen since
the roaring twenties. The ink wasn't dry on the Garn-St Germain legislation,
deregulating the thrift industry, before high-stakes investors, swindlers, and mobs-
ters lined up to loot S&Ls. They immediately seized the opportunity created by
careless deregulation of thrifts and gambled, stole, and embezzled away billions
in an orgy of greed and excess.

The result was the biggest financial disaster since the Great Depression and
the biggest heist in history. Lens of billions of dollars were siphoned out of
federally insured institutions. Following Empire Savings thrift after thrift col-
lapsed, the victims of incompetent management, poor or nonexistent supervision,
insider abuse, and, most important, outright fraud.' By the time the problem
was discovered, there was little left for the FSLIC to do but pay back the depositors
whose money the thrifts had squandered. In just tv\o short years the FSLIC
insurance fund paid out the equivalent of all its income for the past 52 years.

In early 1987 thrift regulators said it would cost the FSLIC $15 billion to
close all insolvent thrifts. (Out of about 3,200 thrifts, at least 500 were insoKcnt
and another 500 were nearly insolvent.) By the end of the year that estimate
had jumped to $22.7 billion. In mid-1988 regulators said the cost could go to
$35 billion. In October they upped the figure to $50 billion. But at the same
time the General Accounting Office*" was saying the shortfall was more like $60
billion. In late 1988 experts' said costs were increasing by as much as $55 million
a day and floated total loss figures of $100 billion or more. When President
George Bush announced his S&'L bailout plan in Februar\ 1989, analy.sts put
the cost at $1 57 billion to $205 billion for the first ten >ears and a total of $360
billion over three decades. They were conceding that the cost of bailing out the
S&Ls would be more than the entire federal deficit. As c\cr\one in Washington
and the thrift industry (except President Reagan, who went eight years without
mentioning the problem) haggled over just how many billions might be missing,

Introduction: Original Sin • 5

the late Senator Everett Dirkson's favorite Wasliiiigton joke came to mind: "A
billion dollars here and a billion there and pretty soon we're talking real money."
The halls of Congress began to hear the first quiet whispers of a taxpayer bailout.
The meltdown of the savings and loan industry was a national scandal, a
scandal that left virtually no player untouched or unsullied. It was above all a
story of failure — failure of politicians, failure of regulators, failure of the Justice
Department and failure of the federal courts. But even as the crisis was being
unraveled and the alarm sounded, thrift executives and their customers continued
to revel in life in the fast lane, surrounded by their women and their mansions,
their Lear jets and their Rolls-Royces. And billions of dollars drifted off into the
ozone never to be seen again. Of the missing money, as much as half had been
stolen outright. Yet few of the hit-and-run artists who infiltrated the thrift industry
went to jail and little of the money was recovered. In short, these inside jobs
not only paid but paid very well indeed. And the savings and loan industry as
Americans had known it for 50 years teetered on the edge of collapse.

Coauthors Steve Pizzo and Mary Fricker were jarred to attention by thrift
deregulation's fallout when tiny, conservative Centennial Savings and Loan in
their rural Northern California hometown of Guerneville began acting strangely
in December 1982 (two months after the signing of the Garn-St Germain Act)
and announced it was going to pay $ 1 3 million cash for a construction company.
Pizzo was editor of the Guerneville weekly, the Russian River News, and Fricker
was news editor. Pizzo wrote a news analysis highly critical of Centennial's plan
to spend seven times its net worth' on a construction company, and he began
aggressive coverage of a succession of strange happenings at Centennial Savings
and Loan.

Centennial officers suddenly were awash with money. Their names popped
up in complex real estate transactions documented at the county recorder's office.
Out-of-town visitors from places like Holland, Las Vegas, and Boston mysteri-
ously came and went, taking money with them. Still the thrift's financial state-
ments recorded phenomenal growth. And the small-town rumor mill geared up
to churn out dozens of explanations for this bizarre behavior. In the Russian
River News, Pizzo began asking some fairly obvious questions of the Centennial
officers: "Where is all this money coming from? " "Who are you lending it to,
and why?" "How can you justify these extravagant salaries, benefits, perks, planes,
luxury cars, boats, and trips?" Was this, Pizzo asked, the proper role for a savings
and loan, heretofore the most conservative, predictable, and reliable of all Amer-
ican financial institutions?

Pizzo's journalistic probings infuriated Frv Hansen, the president of Cen-
tennial Savings, and he exploded. He dispatched his assistant to complain to
the paper's publisher. Periodically he threatened that tellers at Centennial would

6 • INSIDE JOB

monitor withdrawals, and if they were substantial, he would sue the News for
causing a run on the thrift. Drunk in a local bar one night, Hansen told Pizzo's
business partner, Scott Kersnar, "You tell your partner he better stop sticking
his nose where it doesn't belong or I'll do to him what 1 did to that San Diego
reporter on that stock manipulation deal." Pizzo had no idea what had happx^ned
to the San Diego reporter, but he took the warning seriously because he had
already discovered that some of those customers buzzing around Centennial's
loan window had organized crime backgrounds.

For four years Pizzo pursued the Centennial Savings and Loan story, and
gradually his Russian River News articles about Centennial Savings found their
way outside tiny Guerneville. They circulated quietly at the Federal Home Loan
Bank in San Francisco and Washington and at the Justice Department. In late
1985 Centennial collapsed — $165 million was missing.

A few months later Pizzo ran a full-page story entitled "Bust-Out," which
explained the decades-old mob scam of gaining control of legitimate businesses
and then looting, gutting, and abandoning them. Pointing to characters he had
discovered in association with Hansen at Centennial, Pizzo raised the possibility
that Centennial might have been a victim of such an operation. After the article
appeared FBI agents quietly working on the Centennial case took Pizzo aside
and behind closed doors told him they personally believed his premise was
correct.

Three thousand miles away, in New York City, Stan Strachan, editor of a
trade publication called the National Thrift News,'' described by USA Today as
"the Bible of the thrift industry," heard of Pizzo's pursuit of Centennial. He
called associate editor Paul Muolo into his office and told him to go to California
to find out if there was a story in all that alleged skullduggery. Two days later
Muolo sat in Pizzo's small, cluttered Cuerneville office and wondered if Pizzo
was actually onto a story or was just a nut — his bust-out theory left little room
for neutral ground. Was it even remotely possible that deregulation had allowed
organized crime and their legions a foothold in the thrift industry? Muolo had
to admit that thrift failures suddenly were multiplying exponentially around the
country. The National Thrift News was reporting on the collapses every week.
Something frightening, and not at all understood, was going on, and Pizzo's
profile of Centennial's collapse was practically a template that could be laid over
several others Muolo was writing about for the National Thrift News. Pizza
complained that he had tried to alert regulators about Centennial in one way
or another for months, but they had ignored him. The implications of Pizzo's
suspicions were enormous. Muolo went back to New '^'ork to sort out what he
had heard.

A week later Mary Fricker called Pizzo. She had left the News and now
worked for a daily newspaper nearby, but she had followed Pizzo's Centennial

Introduction: Original Sin • 7

stories and had for a year been working on a related investigation of her own.
Slie wanted to sit down and go tlirough his files. Fizzo's Centennial "file" was
a big, disorderly cardboard box stuffed with doeuments and notes. For a day she
dug through the box and weighed tiie evidence that more had been going on at
Centennial than met the eye.

In December 1986 the three of us agreed that whatever was going on at
thrifts was too big a story for any one writer to get his or her arms around alone.
We decided to cooperate in a thorough investigation of savings and loan failures.
We were still running on hunches at that point, but we had enough information
to sense that we were on the threshold of what could be the story of a lifetime.
And so we began sorting through Hunipty Dumpty's eggshells scattered coast to
coast. While industrv' professionals told us time and again that the growing
number of thrift failures were simply the result of natural selection following
deregulation, we steadily amassed evidence that suggested otherwise — Humpty
Dumpt>- had been pushed.

By the end of 1988, Centennial Savings and 581 other thrift institutions
were dead and another 800 were in regulatory intensive care and might not
sunive. Some of the people who had run those institutions were also dead —
garroted, shot, or victims of suspicious accidents. And still the looting continued.
In fact, it threatened to get worse as, incredibly. Congress made plans to dere-
gulate banks. The multibillion-dollar problem created by the insolvency of over
500 of the 3,200 federally insured S&Ls, and the near insolvency of over 500
more, mind-boggling as it was, would be peanuts compared to an equivalent
problem among the 14,000 federally insured banks.

We were driven in our investigation by evidence that much of the looting
in progress at many of the savings and loans around the nation was in fact not
the work of isolated individuals but instead was the result of some kind of network
that was sucking millions of dollars from thrifts through a purposeful and co-
ordinated system of fraud. We saw evidence that classic "bust-outs" were in
progress at thrifts everywhere we looked. At each step of our investigation our
suspicions grew because, of the dozens of savings and loans we investigated, we
never once examined a thrift — no matterhow random thechoice — without finding
someone there whom we already knew from another failed S&L. Yet there was
no coordinated national investigation into the causes of the savings and loan
crisis. Individual reporters and individual FBI agents around the country were
peeking away at their own local thrift failures, but no one seemed to be pursuing
the common links between geographically disparate thrift failures. Pizzo's sus-
picions since 1984 that there was a connection behind much of the looting had
met with scoffs of disbelief at the highest levels of the Justice Department and
the Federal Home Loan Bank Board in Washington. If some group or groups
had successfully orchestrated the theft of tens of billions of dollars from financial

8 • INSIDE JOB

institutions, in broad daylight, without firing a shot, and had gotten away with
it without raising the Justice Department's suspicions, the implications for the
country were grim.

We beheved we were in a race to identify the players in this massive looting
operation. In the process we uncovered mobsters, arms dealers, drug money
launderers, and the most amazing and unlikely cast of wheeler-dealers that ever
prowled the halls of financial institutions. The damage they did to this country's
thrift industry will be with us well into the next century. It will significantly add
to our national debt and will cost every taxpayer in the country another $2,000
in taxes over the next ten years. The 150-year-old thrift industry itself may not

CHAPTER ONE

A Short History Lesson

TTie deregulation of savings and loans in the early 1980s was prompted by a
series of new problems that suddenly beset an industry that had been a stable
member of the American financial community for 1 50 years. The first savings
and loan in the United States — then called a "building and loan" and tailored
after building and loan societies in England — was the Oxford Provident Building
Association, formed in 1831 in Frankford, Pennsylvania (now part of Philadel-
phia). Savings and loans filled a vacuum created by banks, which were primarily
interested in making consumer and commercial loans, not home loans.

There were 12,000 savings and loans in operation by the 1920s but they
were not part of an integrated industry. Each state regulated — or failed to
regulate — its own S&Ls, and regulations differed widely from state to state. At
the same time competition between thrifts and banks was creating friction be-
tween the two kinds of financial institutions. Congress had created the Federal
Reserve System for banks in 1913, thereby giving banks an aura of federal control
and safety that S&Ls did not enjoy. '

In this environment a movement began to initiate federal regulation of thrifts,
but before Congress could take concrete action the stock market crashed in 1929
and the Great Depression followed.- Over 1,700 thrifts failed and depositors lost
$200 million in savings. Thrifts were desperate for help, and their lobby, the
U.S. League of Local Building and Loan Associations (later to become the U.S.
League of Savings Associations, the nation's largest and most powerful thrift
trade association), urged the federal government to come to the industry's aid.

By then thrifts had become a critical element in the national economic
machinery and their troubles could not be easily ignored. President Herbert
Hoover responded to industry pressure and signed the Federal Home Loan Bank
Act in 1932, creating a federal S&L pyramid with the Federal Home Loan Bank

10 • INSIDE JOB

Board (FHLBB) in Washington at the top, 12 semi-independent regional federal
home loan banks (FHLBs) beneath it, and indi\idual savings and loans at the
base of the pyramid/' Thrifts were gi\en the option of being state or federally
chartered, but those wiio chose a federal charter had to operate under strict
federal regulations and examiners were sent to make sure they did.

Many Americans had lost their life sa\ings during the "bank holidays" of
the Depression and they were slow to put their money back into banks and
thrifts. To encourage them to fund their neighborhood sa\ings and loans with
their meager savings. Congress decided the industry needed to insure its depos-
itors' money against loss. In 1934 Congress established the Federal Sasings and
Loan Insurance Corporation (FSLIC),'' which insured deposits up to $5,000 —
big money in those days. The FSLIC (pronounced Fizz-Lick by industry insiders)
insurance system was funded not by the government but by assessments made
on its member thrifts.^

In this new and improved federal thrift system, local insured deposits were
loaned out to local home buyers, who then became solid members of the com-
munity, and new depositors — a business cycle that worked beautifully for 50
years. Savings and loans occupied a special place in America, making home
ownership affordable for the emerging middle class primarily through ^0-year,
fixed-rate mortgages. Thrifts provided the fuel for the home-building engine that
for almost half a cenhiry acted as the fountainhead of America's dynamic do-
mestic economy. Headlines reading "Housing Starts Decline" always predated
recessions, and "Spurt in Housing Starts" always announced the recovery. The
American life-style centered around the single-family home fimded largely by
the little neighborhood savings and loan, a system immortalized in the classic
Frank Capra film It's a Wonderful Life. In the film, jimmy Stewart played
George Bailey, the head of a sleepy little hometown thrift that lent money to
residents of the mythical Bedford Falls. Insiders called those days the ?-6-? days,
when savings and loan executives borrowed (from depositors) at ? percent, loaned
(to home buyers) at 6 percent, and were in a golf cart by 3 p.m.

The first real trouble for this comfortable savings and loan world appeared
during a mildly inflationary period in the 1960s when Congress worried over
the increasing cost of homes. Since the Second World War affordable housing
had become an American birthright. Congress' solution to rising home prices
was to put a cap on the interest rate that thrifts could pay on deposits placed
with them. Congress' reasoning was that if S&'Ls didn't have to pay too much
for deposits, they wouldn't have to charge too much to the homeowners who
borrowed from them.

It was here that Congress' tinkering with the thrift system began going terribly

A Short History Lesson '11

wrong. The interest rate cap, designed to help tlie housing sector, became a
serious handicap for thrifts in the 1970s. The wildfire of inflation that then swept
the economy put savings and loans in a bind*" because by 1979 inflation was
running at 13.3 percent but thrifts were limited to paying only 5.^ percent on
deposits, and depositors were not willing to invest their money at such low rates."
To compound the thrifts' problems, in the 1970s wily entrepreneurs introduced
an entirely new product, the money market fund, which paid higher interest
rates.'' Other companies — like Sears, American Express, and Merrill Lynch —
saw the possibilities and also developed investments to attract savers' deposits.
This increased competition was aided by new technologies. A twenty-first-century
rail of satellite dishes and fiber optics enabled depositors to place their savings
nationwide, even worldwide. They were no longer confined to their community
bank or thrift in their search for a better return on their savings.'' Thrifts hem-
orrhaged from a steady outflow of deposits. By 1982, for example, there was
over $200 billion in money market funds.

The outflow from thrifts quickly reached crisis proportions. In 1972 the
nation's savings and loans had a combined worth of $16.7 billion. By 1980 that
figure had plummeted to a negative net worth of $17.5 billion, and 85 percent
of savings and loans were losing money. Regulators began to warn that if nothing
were done, all thrifts would collapse by the end of 1986.

Throughout the years, when savings and loans experienced financial diffi-
culties, federal regulators had traditionally added more layers of regulation. But
they could not regulate away the effects of inflation, so in the mid-1970s they
decided the opposite approach might work— deregulation.'" In 1980 Congress
finally passed its first thrift deregulation bill, the Depository Institutions Dereg-
ulation and Monetary Control Act, designed to phase out interest rate controls
on deposits placed with banks and S&Ls. At the same time Congress increased
the FSLIC insurance coverage on deposits from $40,000 per account to
$100,000." Regulators later said this may have been the most costly mistake
made in deregulating the thrift industry. Suddenly thrifts could attract $100,000
blocks of (insured) money with which they could wheel and deal at no risk to
the depositor or to the thrift officers. Ironically, this increase in FSLIC coverage
was made with little debate and no congressional hearings. While legislators
were hammering out the details of the Depository Institutions Deregulation and
Monetary Control Act in a late-night session on Capitol Hill, Glen Troop, chief
Washington lobbyist for the powerful U.S. League of Savings Institutions, and
an associate convinced congressmen to make the increase.'^

"It was almost an afterthought," a House staffer later told a reporter."
Deregulation of interest rates by the Depository Institutions Deregulation

12 • INSIDE JOB

and Monetary Control Act was a mixed blessing for thrifts. It did increase their
deposits but it created a deadly profit squeeze in the process. As the cost of
deposits increased, the spread between the price thrifts paid for the short-term
deposits and the rate thrifts had charged for the long-term loans they held (some
of which they might have made 30 years earlier) increased. Thrifts were paying
significantly more interest on deposits than they were receiving on old loans. In
the first half of 1982 S&Ls lost a record $3.3 billion. Thrifts from around the
country found their balance sheets bleeding a sea of red ink, and lobbyists from
the U.S. League of Savings histitutions and other trade organizations begged
Congress to throw them another life preserver. The result this time was the most
significant thrift legislation in 50 years, the Garn-St. Germain Depository In-
stitutions Act of 1982, which Ronald Reagan signed in the Rose Garden cere-
mony in October 1982. Garn-St Germain went beyond simple tinkering. It was
a complex piece of legislation that changed the face of an entire industry with
a pen stroke. Two key elements were:

S&Ls would be allowed to offer money market funds,''' free from with-
drawal penalties or interest rate regulation.

Thrifts could invest up to 40 percent'^ of their assets in nonresidential
real estate lending. Commercial lending was much riskier than home
lending, but the potential returns were higher. This provision made
thrifts vulnerable to enormous losses.'*

Also in 1982, in a move designed to reassure worried depositors who heard
about the thrift industry's problems, Congress passed a Joint Current Resolution
that placed the full faith and credit of the U.S. government behind the FSLIC. '^

Thrift regulators also got the deregulation fever:

To combat the dying off of S&Ls, a regulation requiring a thrift to have
400 stockholders with no one owning more than 25 percent of the stock
was changed in April 1982 to allow a single shareholder to own a thrift.
This did result in the start-up of many new savings and loans, but it
completely changed the character of the industry. Approval for a new
thrift charter had traditionally been based on a clear community need
and widespread local support for the thrift. Now the thrust was to attract
innovative, visionary entrepreneurs to be the saviors of the thrift industry.
What the industry got was a rush of brash, new owners with no other
stockholders to buffer the S&L's well-being from the controlling owner's
ambition, bad judgment, or greed.'*

To make it even easier for an entrepreneur to purchase a thrift, regulators
allowed buyers to start (capitalize) their thrift with land or other "non-

A Short History Lesson '13

cash" assets rather than inoiicy. (This prcnision was a boon to land
developers who had extra land lying around that they had not been able
to develop.)

To encourage more loan business for savings and loans, regulators said
thrifts could stop requiring traditional down payments from borrowers.
Instead, thrifts could provide 100 percent financing, with the borrower
not having a dime of his own money in the deal.'**

Thrifts were permitted to make real estate loans anywhere.'" They had
until now been required to loan on property located in their own market
area, with an emphasis on community home building and ownership.
But with this new regulation (which was intended to encourage a freer
flow of funds from cash-rich to cash-poor areas and to increase loan
opportunities for thrifts), thrifts were allowed to loan on property too far
from home to monitor properly.

On top of these revolutionary changes, owners of troubled thrifts began
stretching already liberal accounting rules — with regulators' blessings — in order
to squeeze their balance sheets into compliance. (Traditional accountants termed
the liberalized thrift accounting methods "voodoo accounting.") For example,
"goodwill" — defined as customer loyalty, market share, and other intangible
"warm fuzzies ' — accounted for over 40 percent of the thrift industry's net worth
by 1986.

In all these ways — Congress passing legislation and regulators easing regu-
lations and accounting standards — the federal thrift industry was systematically
deregulated between 1980 and 1983. And for a while it looked like deregulation
was working. In 1983 and 1984 the thrift industry appeared to grow by $300
billion. Empire Savings, for example, had assets of only $20,7 million in 1982,
but by 1984 it recorded assets of $320 million. George Bailey's little sleepy
building and loan became a powerful money lending/development conglomerate
that could make loans on, or even own, hotels, shopping malls, mushroom and
windmill farms, tanning beds, Arabian horses, Wendy restaurants, and hot-tub
spas — or invest in junk bonds and the futures markets. The sky was the limit
and it could all be done with federally insured deposits.-'

Unfortunately, many of the "entrepreneurs" attracted by these changes were
actually con men intent upon draining as much money from the system as they
could and then moving on. Simply put. Congress and Bank Board officials failed
to add into the deregulation equation almost everything mankind has learned
about human nature since the dawn of recorded history. Greed, avarice, am-
bition, and ego dictate that some things in the social order just can't be left on

14 • INSIDE JOB

the honor system, and at tlie top of that list is the care and feeding of other
people's money.

One former swindler, speaking to us from Fort Leavenworth federal peni-
tentiary, where he was serving time for loan fraud, said his compatriots knew
immediately what deregulation could mean to them. Imagine how they felt, he
recalled, when "they realized they could have access to all the money they ever
wanted."

It's not hard to understand why savings and loans in the 1980s became known
as "money machines." As one regulator remarked years later, "They didn't
deregulate the industry, they unregulated it."

Perhaps conditions could still have been kept under control, in spite of
deregulation, if the examiners responsible for watching over savings and loans
had done their job. So where was that diligent cadre of solemn bank examiners
who had once traveled the country making certain that bankers stayed honest?
Well, first of all, there were a lot fewer of them. The philosophy of the Reagan
administration was that deregulation meant fewer regulators and examiners, so
their number was cut. States, too, cut their supervision staffs. Turnover by 1984
was running at 16 percent. Those examiners who were left were simply out-
gunned, overworked, undertrained, underpaid," and ill-equipped to face down
the new breed of banker attracted by deregulation. Each FSLIC employee was
responsible for watching $18.7 million in assets, about four times the $4.7 million
in assets watched by each'employee of the FDIC, which insured banks. As the
industry deregulated, inspectors accustomed to examining nearly identical sets
of books at each thrift, books based on simple 30-year home mortgages, suddenly
were expected to be able to follow the intricate machinations of highly speculative
finance. Examining a $20,000 loan on a home was a far cry from trying to judge
the quality or prudence of a $20 million loan on a shopping center or a multitiered
master limited partnership.

It wasn't long before thrift failures rippled across the nation like one of those
elaborate displays of dominoes that are erected and then destroyed for the Guin-
ness Book of World Records. But the destruction didn't all happen in a day or a
week or a month. It was four years in the making, and as we followed it we
often asked ourselves the same question that Charles Bazarian, one of the bor-
rowers convicted of fraud, demanded of us:

This all didn't happen just yesterday. This happened over a long jjeriod of
time. So where were the regulators, huh? They like to run around now,
acting like they just discovered all this. Where were they when it was going
on? Where were the goddamn regulators then?

A Short History Lesson '15

Wlicrc. indeed, were the regulators-' wliile thrifts were being looted? During
our investigation we got ver)' Httle in the way of answers to that question.
Spokesmen at the FHLBB either flatly refused to discuss thrift failures or they
lied about them. In 198^ they told us there was no problem. Then later, when
the trouble burst into the open, they lied to us about the size of the problem.
Then they lied to us about the causes of the problem. There was no fraud, no
organized crime involvement — it was the economy's fault, they said. Then they
threw a blanket of secrecy over the solutions they said they had in mind.

In the thrift industry itself, trade groups like the powerful U.S. League of
Savings Institutions worked overtime during the years following deregulation to
make sure the industry's dirty little secret never got out. They feared that if the
public learned that some people were using deregulation to loot thrifts, they
would demand re-regulation.

It was only after we were well along in our investigation, and had cultivated
solid sources within the Justice Department and the law firms working for the
FSLIC, that we began to learn just why everyone was so afraid to talk. If what
we saw at crooked thrifts had concerned us, nothing had prepared us for the
abuses of power we found in Washington. But we also found courage, and we
found the story of a lonely and painful passage for a most unlikely man — Edwin
Gray. U.S. League members had talked Gray into becoming chairman of the
FHLBB. When he took office, in May of 1983, he assumed control of a regulatory
apparatus completely unequipped to handle the coming thrift explosion.

CHAPTER TWO

Shades of Gray

On a Monday in November 1982, stocky, congenial Edwin Gray was in New
Orleans to attend the annual convention of the U.S. League of Savings Insti-
tutions. Gray represented Great American First Savings Bank of San Diego,
California; he was their PR man. His old friend from California, Ronald Reagan,
was to be the keynote speaker at the convention. Gray and Reagan went way
back together — Gray had been Reagan's press secretary during his years as gov-
ernor of California. Gray, 47, was a mainstream Reaganite. He believed in
Reagan and his free market philosophy. When Ronald Reagan was elected
president. Gray had briefly taken a job with the administration as assistant to
the president and director of the White House office of policy and development.
But Gray's wife, Monique, had disliked Washington and its humid climate and
wanted to return to their home in sunny San Diego, so Gray left the adminis-
tration and went back to his post at Great American First Savings Bank.

President Ronald Reagan was coming to New Orleans to tell members of
the U.S. League of Savings Institutions that their industry was well on its way
back to its halcyon days. With the signing of the Garn-St Germain bill less than
a month earlier, Reagan believed he had personally unfettered a mighty industry
which could now rise to towering heights. Gray believed the same, and in fact
he had spent a good deal of time in Washington lobbying for the bill before its
passage. Once, when he submitted a $2,000 expense voucher, his superiors at
Great American Savings quipped, "Since you're spending so much time working
for the U.S. League, lobbying for Garn-St Germain, maybe they can pick up
part of this." One of the items on the tab was $600 for a dinner Gray had hosted
for another old California friend, Ed Meese.

Ed Gray was enjoying being a gadfly at the New Orleans convention when
suddenly Leonard Shane, the 1983 chairman of the U.S. League, pulled him
aside. The position of chairman of the Federal Home Loan Bank Board (the

16

shades of Gray "17

Washington, D.C. , agency that regulated the nation's federally chartered savings
and loans) was coming up for grabs, Shane told Gray. Its current chairman,
Richard Pratt, a Mormon and a burly former educator from Utah, was returning
to private business.' Traditionally the U.S. League had a major say in picking
the FHLBB chairman.

"Ed, wc want you to be the next chairman," Shane told Gray.

Gray was flattered. Bill O'Connell, president of the U.S. League, also asked
him if he'd consider being chairman. Gray told them only that he'd think about
it, but the word had already gone out among the membership that Gray had
been given the League's benediction. Delegate after delegate came up to him
and asked him to take the job. It became a little embarrassing, but the refrain
was like music to Gray's ears. A thrift executive becoming chairman of the
Federal Home Loan Bank Board was like a priest being elected Pope. How could
he say no? Ed Gray's chimney soon issued forth the white smoke of acceptance.

On May I, 1983, Ed Gray was sworn in as the seventeenth chairman of the
Federal Home Loan Bank Board (FHLBB or the Bank Board), a three-member
board that consisted of the chairman and two directors who were referred to as
"members." Under law, one board member had to be a Republican and the
other a Democrat. -

With his wife at his side, Gray raised his right hand and took the oath of
office, administered by his friend attorney general Ed Meese. Then Gray took
off his horn-rimmed glasses and smiled. Those who were there that day remem-
bered that he already looked tired. But being chairman of the FHLBB wasn't a
hard job, and he'd promised Monique he'd stay only two years. Gray would
have to make a lot of upbeat speeches about how well the industry was doing,
and he was expected to support legislation the industry wanted — or that's what
the job had been like for his predecessors. Had Gray known what really lay
ahead, and that his term would turn out to be one of the longest and most
tumultuous in FHLBB histor)', he might have put his right hand back in his
coat pocket and taken Monique home to San Diego.

In the coming four years, until the end of his term in June 1987, Gray
would be investigated by the FBI and the Government Ethics Gommittee and
badgered by congressmen and senators, including the powerful speaker of the
House, on behalf of their constituents. His own administration, and his longtime
friend Ronald Reagan, would turn their backs on him, turning him down when
he asked for more money and more regulators to help deal with the massive
abuses and insolvencies besetting the S&L industry. And that very same thrift
industry that had begged him to take the job would vilify him for his efforts to
save it. Ed Gray would become a pariah.

Gray didn't know it then, but he had just been sworn in as the central
character in an epic drama. And how unlikely a protagonist he was. Ed Gray
was in no way prepared for the task that was about to be handed him. Some

18 • INSIDE JOB

would say he vsasn't qualified for it either. He was a pubhc relations flack by
trade. He gave warm smiles, firm handshakes and great back slaps, and he told
a good story. He was an old-fashioned gentleman with thinning, graying hair
who called his women acquaintances "dear." A nice guy, an honest guy . . .
but he did not have the national stature of a Paul Volcker."'

But then Gray had not been selected on the basis of his qualifications. He
was supposed to be a cheerleader for the thrift industr. and a tool of the ad-
ministration. That point was driven iionie his first day on the job when he
received a phone call from Treasury Secretary Don Regan.

"You're going to be a team player. I take it?" Regan asked him.

"Sure," Gray said, leaning back in his swivel chair. "Sure."

Regan hung up with Gray still holding the recei\er. What was that all about?
Gray wondered.

He threw himself into the job of chairman. He loved the idea of being a
public official, and he took the responsibilih to heart. He was a Mr. Smith Goes
to Washington kind of guy. Ed was no monetary genius, but what he lacked in
experience he tried to make up for by putting in long hours. He wanted to know
what was going on in the industr) and, conversely, he felt it would be helpful
for thrift executives to know what was on his mind. So Gray had his staff mail
copies of all his speeches to the directors and chief executives of the nation's
major thrifts. "The Thoughts of Ed Gray" became a regular part of industry
mail call. Stodgy industry leaders viewed all this with amusement, and the joke
started to circulate that if you suddenly realized you'd been dropped from Ed's
mailing list, it probably meant the Bank Board was getting ready to close your
thrift.

Gray was a very different kind of regulator than his predecessors. Like the
president, who had appointed him, he held strong, sometimes simplistic views
of what he considered to be right and wrong. And when he had to make decisions
on technical matters, he let those instincts mold his course.

Gray's first few months in office passed in relative quiet. The only problem
on his plate at the time was untangling the mess left by the collapse of Manning
Savings and Loan in Chicago. The Bank Board had closed Manning Savings
just before Gray was made chairman. The $117 million thrift had failed after
growing rapidly, not by attracting local deposits but by using deposits from deposit
brokers to invest in questionable real estate ventures.

Deposit brokers handled^ billions of dollars for institutional investors like
pension funds, insurance companies, even Arab nations looking for a profitable
place to park their oil revenues. They scoured the nation each morning for the
highest interest rates being paid that day on certificates of deposit (GDs), and
then purchased $100,000 insured CDs with their investors' money. Such bro-
kered funds became known to regulators as "hot money" because they were
temporary. When the certificates matured^ the money would again flow to

Shades of Gray -19

whomever was paying the best rate that day. I'he fieklencss of these deposits
forced thrifts to offer higher and higher interest rates to attract them.

Brokered deposits, in small doses, could help a thrift stabihze its deposit base
and give it a quick, though expensive, source of funds when the thrift was a
httle short. But Manning Savings had overdosed on brokered deposits. An old
adage came to Gray's mind: The only thing that separated a medicine from a
poison was the quantity in which it was used. Gray remembered another time,
back in the 1960s, when thrifts had turned to brokered deposits in a big way.
The result was a wave of cut-throat thrift competition for deposits that drove up
the interest rate the S&Ls had to pay to attract those deposits. Thrifts willing to
pay the highest price then grew too fast. The FHLBB in Washington had ended
the practice in July 1963 by limiting the amount of brokered deposits a thrift
could hold to 5 percent of its total deposits.

But that was old-fashioned regulation. In 1980, when thrifts were having a
hard time attracting deposits, regulators had repealed the 5 percent limit, and
brokered deposits once again became all the rage. But unlimited brokered deposits
combined with Garn-St Germain, which deregulated what thrifts could do with
those deposits, created a volatile chemistry. Thrifts could get their hands on all
the money they wanted and could invest that money in almost any scheme they
thought might turn a profit.''

Gray saw immediately the risk inherent in the combination of ambitious
entrepreneurial thrift owners, with their quest for high-yield investments, and
the easily available brokered deposits to fund those investments. He knew that
the Federal Deposit Insurance Corporation (FDIC)'^ under chairman William
M. Isaac* was struggling with a similar problem, following the 1982 collapse of
Penn Square Bank, a small shopping-center bank in Oklahoma City. Brokered
deposits had fueled Penn Square Bank's wild speculation in oil industry invest-
ments and had contributed to an unhealthy atmosphere of management fraud.
(In 1988 a bank official would plead guilty to criminal charges in a scheme that
regulators said involved risky loans and kickbacks.) But few people in Washington
other than Isaac, and almost no one out in the 50 states, shared Gray's assessment.

Since the creation of the federal S&L industry in 1932, state and federal
savings and loans had coexisted peacefully. State thrifts could receive FSLIC
insurance if they chose to pay the premiums,"* but they were regulated by state
agencies and state regulations instead of the FHLBB and federal regulations
(except that they did have to adhere to FSLIC standards). On the whole the
differences between state and federal regulations were slight (though state reg-
ulations tended to be more liberal than federal regulations) until federal dereg-
ulation in the early 1980s changed the rules of the game. Then, many say, real
deregulation happened on the state level. Notable among the states with more

20 • INSIDE JOB

liberal thrift regulations were Arizona, Florida. lilinoi.s, Louisiana. Michigan,
Mississippi, Missouri, New York, North Carolina, Ohio, Virginia, and Wash-
ington. But Texas and California outdid them all, grabbing the lead in dereg-
ulation one-upmanship (Texas won first place, but California ran a close second).

Actually, deregulation was not new to Icxans. They had significantly lib-
eralized regulations for state-chartered thrifts in 1972 and again in 1981. In
addition, banking had for years been done differently in Texas. Typical features
of the state thrift business included risk-taking, wheeling and dealing, and dom-
ination by a good-old-boy network that had close ties to the most pov\ erful Texas
politicians. When oil prices went from $7.64 per barrel in 1975 to $34.50 per
barrel in 1981, the Texas economy boomed, building permits quadrupled, and
Texans thought they were invincible. All the thrift industr\' needed then to rocket
into the stratosphere was for the feds to approve brokered deposits and for the
FSLIC to decide to insure S&L deposits up to $100,000 each, all of which
happened in 1980. In the early 1980s Texas thrifts attracted huge deposits by
promising to pay a higher interest rate than anyone else in the country, and
they invested those deposits in commercial real estate ventures. Texas thrifts
grew at roughly three times the national average. So many new owners were
attracted to thrift ownership in Texas — because Texas thrifts seemed to be able
to get their hands on endless supplies of money and the Texas real estate market
was booming — that by 1987, when Texas thrifts finally were failing in large
numbers, '" 50 percent were run by managers who had entered the business after
1979 (over 80 percent were former real estate dcxelopers).

Typical of the new thrift owner in Texas was Har\ey D. McLean, a Dallas
developer and chairman of Paris Savings and Loan. Reports in BusinessWeek
that he had attended a costume party wearing punk regalia and blue hair and
joked that he was dressed that way to visit his banker surprised no one in the
out-of-control I'exas thrift environment. Durward Curlec, a Te.xas thrift lobbyist
who had been executive director of the powerful Texas Savings and Loan League,
was referring to Texas thrift owners' penchant for fleets of airplanes when he
remarked to a BusinessWeek reporter, "That's not criminal. That's Texas.""

Out in California state-chartered savings and loans had been struggling to
survive since 1975 under a state administration'- that employed hard-nosed
regulators. When the federal government eased up on regulations between 1980
and 1982, over half of the state's S&rLs, including most large California thrifts,
switched to federal charters." The result was a precipitous drop in S&L contri-
butions to state politicians and also in income (from fees charged to member
thrifts) for the California Department of Savings and Loan, which regulated state
S&Ls. The department lost more than half its income and had to lay off more
than 60 state examiners. Under those dire circumstances Governor Edmund
Brown, Jr. decided to treat S&Ls more kindly.

Former State Assembly Minority Whip Paul Priolo told us later that the

shades of Gray • 21

California League of Sa\ing.s Associations (the Cal League), the thrift industry's
statewide lobbying group, lobbied the state legislature every year with the same
theme: "They told us every year that we had to pass legislation to match any
federal legislation that might cause thrifts to switch to federal charters. The
buzzword was 'parity.' I'hey constantly lobbied for parity, or better, with federal
legislation. And they almost always got what they asked for. " Priolo said legislators
knew little about the thrift industry and relied on the Cal League for guidance
in drafting new state regulations. A former federal regulator said state politicians
were also concerned they would lose contributions if state-chartered thrifts
switched to federal charters.

in response to the political and financial pressure. Republican state assem-
blyman Pat Nolan, who was an associate of a number of S&L executives,'^
sponsored the Nolan Bill, which became law January 1, 198?. Under the terms
of the new California law, virtually anyone could own an S&L, attract as many
deposits as he could pay for, and invest all those deposits in anything. And it
could all be insured by the PSLIC and backed by the full faith and credit of the
U.S. government. California's deregulation made Garn-St Germain look con-
servative by comparison, and in retrospect it was a terrible mistake. But only
one lawmaker voted against it, and traditionalists in the thrift industry who
worried about it kept their concerns to themselves. (Five years later, however,
they would claim that the thrift industry's problems were not their fault.)

Later Ed Gray would remark, "Can you imagine? Any business, any entre-
preneur [in California] could get a charter and could run whatever operation he
wanted on the credit of the U.S. government? Imagine that! It didn't matter.
You could choose any business you wanted to be in. . . . Just incredible."

Ed Forde, who owned San Marino Savings and Loan in Southern California
(which failed in 1984 soon after Empire Savings collapsed), told us years later
how he felt when he learned of the new California regulations at a seminar
sponsored by state regulators. " 'My god,' I said to myself, 'this is what I've been
waiting for all my life!' " Clever consultants and law firms began canvassing the
state offering seminars on owning one's own savings and loan. Jeffer, Mangels
and Butler, for example, was a Los Angeles law firm that gave seminars called
"Why Does It Seem Everyone Is Buying or Starting a California S&L?"'''

The strategy failed to attract back most of the thrifts that had recently .switched
to federal charter, but it did attract hundreds of entrepreneurs interested in starting
new S&Ls. What politicians and regulators later claimed they could not foresee
(the loopholes and opportunities created by deregulation) were instantly recog-
nized by those who wasted no time flooding the state with applications — 235
between April 1982 and the fall of 1984. Unfortunately, the rush of applications
far exceeded the state savings and loan commissioner's ability to investigate the
applicants.

When the job of state commissioner became available in March of 1983

22 • INSIDE JOB

(with the new Republican administration of George Deukmejian), Ed Gray
recommended his friend Lawrence W. Taggart for the post.'*' But Taggart, it
turned out, had a very different regulatory philosophy from Gray. Gray was
deeply troubled by the brokered deposits that by 1983 were fueling fearful growth
in California, but Taggart saw no problems. When many of the new California
thrifts ballooned their assets from the minimum start-up capital of $2 million
to tens and then hundreds of millions of dollars, using brokered deposits, and
when growth rates at some California thrifts exceeded 1,000 percent a vear,
Taggart wasn't worried. On the contran,-, he took a real shine to the new breed
of thrift owners, accommodated them in e\ er>- possible way, and approved their
thrift applications as soon as the paperwork could be completed (he approved
60 charters in his first six months in office).

And look who showed up as California savings and loan owners:

Dr. Duayne Christensen, a Southern California dcntist-turned-real-estate-
speculator, got tired of begging for loans from straitlaced thrift officers and in
January 1983 he opened North American Savings and Loan in Santa Ana,
California. A married man with teenage children, Christensen had undergone
a midlife crisis of some sort and had taken up with a flashy real estate lady from
Oak Grove, California, Janet F. McKenzie. Both apparently shared a burning
desire to be rich.

In short order, according to an FSLIC lawsuit, the hvo began to wheel and
deal with North American's deposits, investing them in grossly overappraised
real estate projects in which they held a secret interest. One project alone (a 20-
unit condominium project in Lake Tahoe, Nevada), which they acquired for
less than $4 million, they sold back and forth to artificially increase its value to
$40 million, regulators said. Reno mortgage broker John Masegian helped put
together loans for the condominium deal. The next month, February 1983,
while he was attending a savings and loan con\ention in Miami, he was garroted
in the stairwell of the Fountainebleau Hilton. The murderers had tried to stuff
his body down the trash disposal chute but it wouldn't fit.'" No one was charged
with his murder. A security guard claimed that a few months later Christensen
tried to hire him to kill a business partner who lived in Arkansas, but later
Christensen changed his mind.

North American collapsed in June 1988 and cost the FSLIC $209 million.
The day before North American was seized by federal regulators, Christensen
was killed in a mysterious single-car accident when his Jaguar slammed head-
on into a freeway abutment at six o'clock in the morning, leaving a $10 million
life insurance policy that named McKenzie as sole beneficiary and a will Chris-
tensen had signed three days earlier that named McKenzie as his sole heir. The
coroner ruled out foul play in Christensen's death and the $40 million that
regulators said Christensen and his associates spirited out of North American

shades of Gray ■ 23

Savings remained missing. In April 1989 McKcnzie and four others were indicted
and charged with racketeering. The case was pending as of this writing.

A few miles away, in Raniona, California, former rug salesman John L.
Molinaro and his partner Donald P. Mangano, who owned a construction
company, were granted a charter and opened Ramona Savings and Loan in
April 1984. in short order the thrift made loans to condominium construction
projects being built by Mangano & Sons Construction Company, condominiums
whose floors were later covered by carpets from Molinaro's carpet store. Regu-
lators and the Justice Department later charged that the two men became more
and more bold in devising ways to part Ramona Savings from its deposit money
as time pas.sed. Two years after opening its doors Ramona Savings collapsed into
insolvency. FSLIC officials said Ramona Savings would cost them $70 million.

Ten months after Ramona Savings' collapse, a San Francisco passport clerk
caught Molinaro trying to get to the Cayman islands"* on a dead man's passport.
When the FBi arrested him and searched his Mercedes, they found false IDs
and materials on how to establish a false identity and launder money. They also
found, and filed in court, his list of things to remember, which included . . .
"consider storing gold in Cayman deposit box . . . write out a plan for depositing
Cayman cash and bringing some back thru (sic) Canada" . . . etc. When FBI
agents checked inside the Cayman safe-deposit boxes, they found what the FSLIC
believed was some of Ramona's money. Molinaro told FBI agents he had de-
posited $3 million at First Cayman Bank, and in safe-deposit boxes he had
stashed $278,000 in cash and $100,000 in gold and diamonds ... all accessible
by secret code.

The list of colorful characters who showed up at thrifts in California following
deregulation was a long one, and they arrived at a time when the state regulatory
commission was crippled by the recent loss of 60 examiners (caused by the
budget crunch when state thrifts defected to federal charter from 1980 through
1982). Not until Taggart was succeeded by William Crawford as state savings
and loan commissioner in 1985 would the examining staff begin to be rebuilt.

During those undersupervised years high fliers and swindlers looted the thrift
industry of billions of dollars, right under the overworked examiners' noses. They
even developed shoptalk to describe their crooked deals: "dead cows for dead
horses," "cash for trash," "kissing the paper," "land flips," "daisy chains," and
"white knights." Each was a sleight of hand that rogue thrifts employed around
the country to confuse regulators and hide the frauds that underlay their oper-
ations.

The profligacy of thrifts around the country, especially in Texas and
California'"' (and secondly Florida and Arizona), didn't begin to catch Ed Gray's
eye in Washington until the Empire Savings failure in 1984. By that time the
horse was definitely out of the barn. Most of the problems were developing at

24 • INSIDE JOB

state-chartered thrifts rather than federally chartered institutions (because the
states adopted regulations even more lenient than were enacted on the federal
level), but Gray was affected in a very important way by what happened on the
state level because the FSLIC, which he and his fellow board members at the
FHLBB administered, insured most of those state thrifts and would have to bail
them out should they fail.-" Ironically, it was precisely the FSLIC coverage that
made the looting of thrifts so lucrative and relatively risk free — for everyone
except the FSLIC and, uUimately, the taxpayer. Thanks to the FSLIC insurance,
depositors didn't have to worry about their money, and the people who were
spending it certainly didn't.

CHAPTER THREE

Centennial Gears Up for

Deregulation

Before deregulation most thrifts were small. One did not go into the savings and
loan business to get rich. In fact, starting a small community-based savings and
loan bordered on performing community service — local people pooling their
resources to assure there would be a safe place for their savings and a source for
home loans. These small-town thrifts were just barely eking out a living when
deregulation passed Congress and they became the prime targets for the wolves
that deregulation unleashed. They were easy targets for the fast-talking high
rollers who showed up to wow the mostly unsophisticated managers and boards
of directors with promising projects or to offer top dollar to local shareholders
for their stock. Hundreds of small thrifts across the nation fell into the wrong
hands in the weeks and months following deregulation, and one of those was
Centennial Savings and Loan, a state-chartered thrift in Northern California.
From its plain vanilla beginnings. Centennial rocketed to unimaginable heights
within just a few months after deregulation. But few people became concerned
about the metamorphosis until Centennial's officers threw a spectacular Christ-
mas party at the end of 1983.

It was the most lavish Christmas party anyone could recall. "Elegant Re-
naissance Faire" was the theme. Couples gasped as jesters proclaimed their entry
into the hall, now transformed into an Elizabethan forest of 300 living trees
sparkling with 75,000 tiny white lights. Candlelight shimmered through piped-
in fog that simulated the moors and woods of Nottingham. Oriental rugs covered
the floor.

Once seated among the trees, the 500 invited guests were entertained by a
hundred roving Robin Hoods, fiddlers, jugglers, jesters, and pantomimes. Wait-
ers and waitresses, one for every two guests, wore Elizabethan costumes — swagger
plumed hats, ruffled laced bodices, yards of velvet. They rolled the ten-course.

25

26 • INSIDE JOB

three-hour meal into the hall on flaming carts, meats crackling on open spits,
each course iieralded by twcKc trumpeters.

Men and women visihng the rest room were attended by shoeshine boys for
the men and maids-in-waiting with an array of makeup and perfumes for the
women. Dancing continued until three o'clock in the morning, and to this day
many say it was the most romantic evening of their lives.

It was Christmas 1983 in Santa Rosa. California, and Centennial Savings
and Loan officers spent $148,000 to show their friends, stockholders, and area
politicians that the S&L had arrived. For the little thrift it was as much a coming-
out party as a Christmas fete. But for those of us who had been paying close
attention, it was another reason for concern. This was a very different Centennial
from the small thrift that had opened in 1977 in Guerneville (population 1,700),
20 miles west of Santa Rosa.

Guerneville was on the banks of the Russian River 60 miles north of San
Francisco. It had been a popular summer resort among the redwoods in the
1940s and 1950s, but it had faded considerably as tourists passed it by for more
exotic destinations in the sixties and seventies. Property values slid as the only
takers for the old summer cabins were realtors and speculators betting Guerneville
would soon become a bedroom community of its fast-growing neighbor, Santa
Rosa (population 70,000). A handful of local investors drawn from Guerne\ille's
hard-hit business community joined resources to raise the $2 million regulators
required of a new savings and loan, and they opened Centennial in the hojie
that the realtors and speculators were right. Their plan was to make home loans
to those who would live in Guerneville and work in Santa Rosa.

But the vision was slow in materializing and the little thrift spent its first
three years going through a succession of lackluster presidents, none of whom
left a memorable mark on the town or the institution's bottom line. However,
as 1980 approached so did the dawning of the deregulation of the savings and
loan industry. Centennial's directors wanted someone at the helm who could
sail their little thrift out of becalmed seas and into the uncharted potential
promised by this newly deregulated industry.

One of Centennial's directors recalled his acquaintance with a man who
had plenty of experience in the thrift industry. Erwin "Erv" Hansen, age 48,
had been bouncing around the indiistn a long time. He had worked as a senior
executive for Imperial Savings and Loan in Southern California, as a deputy
commissioner and the number two person in the California savings and loan
commissioner's office, as CEO for Far West Financial in Newport Beach, Cal-
ifornia, and as chief accountant for the Federal Home Loan Bank Board in
Washington, D.C. He was well known in the industry and was regarded as a
conservative banker.' As frosting on the cake, Er\ was married to a local gal,
Gayle, who told friends she looked forvvard to returning home someday.

Centennial Gears Up for Deregulation ■ 27

Early in December 1980, Erv Hansen drove into town in an aging car packed
with family and belongings and on December 16 Centennial's board of directors
voted to make Erwin Hansen the thrift's fourth (and last) president.

Everyone just called him Erv. He shunned traditional banker's garb. Instead
he would have looked right at home on the street in Dallas, with his Western
sports coat and slacks, open-collar shirt, shiny bucking-bronco belt buckle, and
pointed-toe cowboy boots. A tall man, he wore the outfit well.

Erv cut a very different figure than Centennial's former presidents and he
quickly won the friendship of Guerneville's redneck cowboy community with
his love of drink and good company. His office away from the office was the
Appaloosa Room at Buck's bar and restaurant, where he routinely held court
after work and late into the evening. He'd buy drinks all around and regale those
present with well-told stories, mostly about himself and his past exploits in the
bigger world outside Guerneville. But Erv's favorite tales soon switched to a new
theme: what he was going to do, what deregulation meant to him and Centennial,
how the sky was the limit.

"The beauty is that there's going to be enough money in this for everyone,"
he liked to boast.

Erv swept the townsfolk off their feet. Even those put off by his sometimes
arrogant ways found it hard to criticize him. He seemed a cross between John
DeLorean and J. R. Ewing. But there were two dangerous unknowns: no one
understood just what deregulation of thrifts meant in practical terms, and no
one really knew Erv Hansen.

It took time for Hansen to spur the lazy little thrift to a gallop. With its net
worth of just $1.87 million, there wasn't much he could do, and shallow-
pocketed locals were clearly not going to be the source for the kind of money
he needed. But he had a plan. He knew where he could get plenty of capital,
practically overnight — hundreds of millions of dollars in brokered deposits, just
for the asking. But Centennial's directors, officers, and shareholders weren't
ready just yet for the kind of moves Erv had in mind. So he decided to bide his
time for a while and build alliances at Centennial with those who shared his
vision.

Beverly Haines began as a teller at Centennial when it opened its doors in
1977. Haines, 44, had been married to a well-to-do San Francisco contractor,
but an unpleasant divorce in the early 1970s left her at times living at' the pleasure
of friends and relatives. She eventually moved into the family's summer cabin
in Guerneville with her teenage son, who had recently been paralyzed in an

28 • INSIDE JOB

auto accident. His injuries left him in a wheelchair and in need of 24-hour
care. Haines was totally dedicated to her .son, caring for him at night while
working at Centennial during the day.

She was bright and articulate, a short, well-dressed blonde with a cultured
way of speaking and moving that attracted fawning admirers. She moved from
teller to receptionist and held that position when Erv Hansen arrived on the
scene in 1980. Haines was clearly a woman u.scd to better circumstances, and
Hansen felt he and Haines had something to offer each other. The two became
fast confidants, often meeting behind closed doors. Beverly was clearly on her
way up. Hansen soon appointed her executive vice president of Centennial and
put her in charge of the thrift's money desk, the entry point for large deposits
from pension and trust funds and deposit brokers. It was a key position that later
would become the fulcrum of the wheeling and dealing that Hansen had in
mind.

At this time Siddharth "Sid " Shah was in Santa Rosa tr\ing his hand as a
developer and not having much luck. Shah, 47, an East Indian, had come to
the United States in 1963. He had majored in engineering at Stanford University
near San Francisco and had gone to work for nearby Piombo Corporation, a
heavy-construction company.- Shah worked for Piombo for 13 years, during
which time he managed the company's projects in Saudi Arabia and, later,
around Santa Rosa.

Shah oozed a confidence that some found repulsive and others found cap-
tivating. He was quiet, shrewd, and inscrutable. Associates described him with
amazement as someone who "got things done," "knew how to work all the
angles, " "was always working on some kind of deal ... a genius with paper"
who could wring every penny out of a construction job.

During his stay with Piombo, Shah acquired 8 percent of the company stock.
In early 1982 Shah and Piombo had a parting of the ways and Shah announced
he was leaving Piombo to strike out on his own. Piombo had a long-standing
policy of purchasing any stock that a departing employee had accumulated during
his stay with the company, but in this case Shah and Piombo's owners were not
even close to a mutually agreeable price. Shah wanted $1 million for his shares.
Piombo said the stock was worth only $200,000. Shah said he felt his price was
fair because he believed the company could be sold for $13 million. Piombo's
shareholders, eager to give Shah the opportunity to prove it, gave him an option
to purchase Piombo for $13 million — but only if he could close the deal within
a year.

Meanwhile, Shah's Lakewood Enterprises — a development company in
Santa Rosa — was going nowhere, and in the spring of 1982 Shah turned to Erv

Centennial Gears Up for Deregulation • 29

Hansen and Centennial. Botli men had big plans. Both told associates they
wanted to make big things happen. And both saw a deregulated thrift industry
as the opportunity of a lifetime.

Shah introduced Hansen to Dutch investor Nicholaas Sandniann, ^6, who
had sailed mysteriously into town with plans to develop the old 1,000-acre George
Ranch east of Santa Rosa. Handsome and charming, with a lovely young wife,
"Neik" quickly captured the imagination of the San Francisco area jet set. Herb
Caen, columnist for the San Francisco Chronicle, described Sandmann as the
"high-flying newcomer from Holland." Other press reports said he was "a re-
clusive Dutch businessman who lives in a multimillion-dollar mansion in Am-
sterdam."

He fit perfectly into the genteel Sonoma County horse-and-winery set of
which Santa Rosa was the center. There the gentry played polo and croquet and
sipped chardonnay and cabernet — made in their own cellars — on their mag-
nolia-shaded verandas overlooking vineyards soothed by Pacific Ocean mists.
Sandmann knew how to play that game. Shah and Hansen were eager to learn.

hi July of 1982, regulators said, loan money began to flow among the three
men. Centennial loaned Sandniann $5.4 million on his George Ranch devel-
opment and paid Shah's company, Lakewood Enterprises, a $150,000 finder's
fee for introducing Sandmann to Centennial. Later the George Ranch deal
would collapse in a flurry of defaults and allegations of fraud, inside deals, and
kickbacks, but in 1982 it looked brilliant and significantly improved Centennial's
financial statement.

Such large loans improved a thrift's financial picture because thrifts were
allowed to book a lot of income immediately upon making a loan. For example,
they collected points — usually 1 percent to 6 percent of the loan. On a $1
million loan with 5 points, a thrift could immediately book $50,000 in income.
Fees, such as "loan origination fees, " were also added to the borrower's bill.
These, too, went right on the thrift's books as income as soon as the loan was
made. Simply put, loans generated instant income for thrifts, and the bigger the
loan, the bigger the income. Often thrift executives used inflated appraisals to
justify even larger loans, so they could book even larger profits, which in turn
justified large bonuses for the executives.

Unfortunately, all this profit was only on paper because thrifts routinely
added the points, fees, and even the interest to the amount of the loan.' For
example, if a borrower wanted a $1 million loan, the S&L might loan him $1.2
million and put the extra $200,000 in a reserve account to cover the first two
years' worth of interest. In effect, the S&L was paying itself until the reserve
account ran out. The reserve accounts made a loan appear current for a long
time regardless of the true state of the project (or the whereabouts of the bor-
rower)."" And if the loan came due and the project then turned out to be phony.

30 • INSIDE JOB

the loan could be rolled over (renewed) on the theory, California Savings and
Loan Commissioner William Crawford later quipped, that a rolling loan carried
no loss.

With such tricks up his sleeve, Hansen had no worries about the generosity
of Centennial's loan on the George Ranch. He was on a roll. Sensing the
momentum he was building, he struck quickly. One bold move would follow
another, starting with the boldest of all: In August of 1982 Hansen convinced
Centennial's board of directors, which now included one-time receptionist Bev-
erly Haines, to purchase Shah's option on Piombo Corporation for $100,000
and to pay Shah $1 million for his Piombo stock — five times more than Piombo
itself was willing to pay. Centennial would then exercise the option and purchase
the giant construction company for $13 million cash, proving Shah to be a man
of vision by validating his boast to skeptical Piombo shareholders that their
company was worth $1? million. Shah would become head of Piombo and an
executive at Centennial the day the deal closed.

Centennial would benefit, Hansen argued, because deregulation was making
it possible for thrifts to invest in commercial real estate and become development
companies, and Centennial needed to position itself to take advantage of the
new opportunities for fun and profit. California's Nolan Bill, which allowed
state S&Ls to invest 100 percent of their assets in speculative ventures, was set
to go into effect January 1, 1983. Hansen was pushing Centennial up onto the
cutting edge of California's thrift deregulation movement.

Centennial's board of directors approved the plan but kept it secret, and in
September, four months before the deal was set to close. Shah, still technically
only a customer and therefore exempt from banking regulations that forbade
large loans to thrift officers, received a last-minute flurry of loans from Centen-
nial. In a nine-day period, FSLIC documents indicate. Shah and Lakewood
Enterprises received four loans, totaling $1,450,000, secured by various prop-
erties that the FSLIC would later claim were worth far less than the amounts
of the loans. In 1981 Shah's company had reported to the IRS only $100,815
in assets and a loss of $16, 576. Needless to say, most bankers would not consider
that sufficient security for a $1.45 million loan. (All four loans would ultimately
end up in default.)

In late November, Hansen made the Piombo deal public. Centennial
was purchasing Piombo Corporation, he announced, for $14,100,000 ($13
million in cash to Piombo, $1,100,000 to Shah). Steve Pizzo had just taken
over as editor of the Russian River News and immediately began to hear com-
plaints from friends who were Centennial shareholders. They were confused,
angry over being frozen out of the decision, and concerned about the way the
deal appeared to have been ramrodded through Centennial's board of directors. '
Pizzo, a former real estate broker and investor himself, also found the deal
perplexing. It was a highly speculative move on Centeimial's part and he couldn't

Centennial Gears Up for Deregulation 'SI

figure out where Centennial was getting the $1? million in cash to purchase
Pioinbo Corporation.

After a couple of clays of stalling, Hansen finally agreed to an interview for
the local paper. It was Pizzo's first encounter with Hansen, who greeted him
dressed in brown Western slacks, cowboy boots, and Western shirt with open
collar. Hansen's six-foot-plus frame filled the small four-by-cight office. A gold
Rolex watch glittered on his wrist, a gold chain and pendant hung around his
neck, and a large gold-and-silver cowboy buckle cinched his belt.

Deregulation was going to be a real boon to Centennial Savings and Loan,
Hansen told Pizzo. It was going to pull the little thrift out of the doldrums and
into the financial fast lane. And part of the steam for this engine, he said
expansively, would be generated by the construction company, with its ability
to develop large real estate projects.

Hansen and Pizzo did not hit it off. There were big holes in Hansen's analysis
and Pizzo wrote a commentary that raised questions about the wisdom of the
deal itself and about the potential conflicts of interest inherent in a lender owning
its own development company. What would prevent the lender from making
risky loans to that subsidiary, especially during recessions, when development
companies invariably fell on hard times? Pizzo's editorial hit the street a few
days later and provoked a roar of outrage from Hansen. He threatened to sue
the Russian River News if the piece resulted in any substantial withdrawals by
depositors, simply the first salvo in what would turn out to be a three-year diatribe
to silence opposition.

When Pizzo asked Erv where Centennial was getting the $13 million in
cash to buy Piombo, Hansen waved his hand in the air and brushed the question
off by stating that the money was "brokered deposits from the East Coast and
from the Bureau of Indian Affairs." Hansen had strapped Centennial onto the
roller coaster of brokered deposits, the "hundreds of millions of dollars just for
the asking" that he had all along intended to tap as soon as he built alliances
and had Centennial's board of directors under his control. He had acquired
these deposits simply by placing ads in The Wall Street Journal guaranteeing to
pay interest rates on insured certificates of deposit (CDs) that were slightly higher
than the going market rate (in 1982 the going market rate was averaging 10.4
percent and in 1983, 9.22 percent).

Once a thrift began to depend on brokered deposits, it was in for a wild ride.
Like using cocaine, the lure of easy brokered deposits often began innocently
but soon became a compulsion and finally a physical necessity. Brokered deposits
were a way for a thrift to grow larger than the resources of its local depositors
would normally allow. Centennial's total assets at the beginning of 1983 stood
at $49 million. By the time regulators seized the thrift in August 1985, its assets
had ballooned to a grotesque $404.6 million, thanks in large part to brokered
deposits.

32 • INSIDE JOB

When Hansen told Pizzo he was using "brokered deposits from the East
Coast" to purchase Piombo Corporation, Pizzo understood. But Hansen's "Bu-
reau of Indian Affairs" comment, which Hansen wouldn't clarifv', left Pizzo
baffled for five years. Finally, one day in 1988, after we were well along in our
investigation of savings and loans elsewhere, we received a thick, unmarked
package from an attorney on the East Coast. The contents of the package had
nothing to do with Centennial (they related, instead, to Mario Renda, an East
Coast deposit broker who was placing deposits at Centennial. See First United
Fund chapters), but they provided the clue that enabled us to piece together the
Bureau of Indian Affairs (BIA) puzzle.

Among the dozens of enclosures in the package was a handwritten letter to
the East Coast attorney from an inmate at P'ort Leavenworth federal penitentiary.
He said he was serving a five-year prison sentence for wire fraud that involved
a credit union, brokered funds, and linked financing. He told the attorney that
the Bureau of Indian Affairs was involved in many of the failures of financial
institutions, and he said he knew the names of companies and people in those
companies whose job it was to take gifts to BIA officials.

Ringing in Pizzo's ears as though it had been the day before and not five
years earlier was Han,sen's comment that he was getting money from the BIA.
We called the attorney on the East Coast, but she had no idea what the BIA
reference meant and, in fact, had paid no attention to it because it didn't make
sense to her. So we contacted the prisoner at Fort Leavenworth who had written
the letter and he gave us the leads we were after.

We discovered that the BIA controlled one of a number of large government
trust funds that deposit brokers tapped into for deposits — brokers got deposit
money firom pension funds, credit unions, and oil sheiks, and they also got
deposit money from government trust funds. The BIA at that time managed
$1.7 billion for American Indians. The Bureau was required by law to invest
the money with government-insured institutions (by purchasing short-term CDs),
and as often as several times a week they notified brokers that they had money
to invest. Brokers served as middlemen, searching the nation for institutions
offering the highest interest rate on short-term CDs on the day the BIA money
became available for investment.

Brokers placing funds for the BIA were paid a commission from the institution
that received the BIA deposits. There was fierce competition among brokers for
the BIA money, and in depositions taken in the Fort Leavenworth prisoner's
case in 1985, a deposit broker told the court it was his understanding that bribes
to BIA officials in exchange for deposits were a routine business expense for
deposit brokers.*

Since the S&Ls paying the highest interest rate on deposits were the S&Ls that

Centennial Gears Up for Deregulation • 33

were so desperate for money that they were wilhng to pay whatever it took to get it,
this process put government in the position of rewarding, i.e., pouring money
into, the nation's weakest financial institutions. For this reason regulators in
Washington vehemently opposed the use of deposit brokers by managers of gov-
ernment tru.st funds. Their opposition centered on the BIA fund because it was
the largest government trust fund, but when they tried to halt the investment prac-
tice they ran up against the political opposition of a tough lobby, the Indian lobby,
which naturally enough wanted to get the highest possible return on its invest-
ments. FHLBB Chairman Ed Gray complained bitterly during this time that the
BIA was channeling much of its deposit business to the country's weakest thrifts.
He said that the BIA had funds in practically every thrift that had recently failed.

We now knew where Centennial got the fuel to power its enormous
growth — from deposit broker Mario Renda and the money changers handling
deposits for the BIA trust fund. There was enough money out there to feed
hundreds of Centennials.

Centennial's purchase of Piombo, funded by brokered deposits, closed on
January 6, 1983. In a staggering increase of assets. Centennial went almost
immediately from a neighborhood savings and loan with a net worth of $1.87
million to a development conglomerate with thrift, construction, and develop-
ment subsidiaries. The deal made Shah and Hansen wealthy and powerful,
virtually overnight. Using the $1 million Centennial paid him for his Piombo
stock, Shah bought up Centennial shares from disaffected Centennial share-
holders until he became the thrift's largest single stockholder. He became ex-
ecutive vice president of Centennial, chief executive officer of Sonoma Financial
Corporation (Centennial's new development subsidiary), and chief executive
officer of Piombo, at a salary of $120,000 a year for five years, plus a yearly
bonus (like Hansen's) of 10 percent of Centennial's profits. In a short six months
Sid Shah had gone from construction engineer and failing developer to Northern
California mover and shaker.

Hansen and Shah came to rely on brokered deposits to fiind much of their
activity at Centennial. But brokered deposits, with their combination of high
interest rates and commissions to deposit brokers, were an expensive way to get
money, so Hansen and Shah had to come up with a profitable use for it. And
Erv, though he began short on funds, was never short on ideas. He planned to
turn Centennial the sow's ear into Centennial the silk purse through real estate
speculation. By early 1983 the critical pieces of the plan were in place, with
one exception: Hansen wasn't satisfied with just his fat salary. He needed access
to even more money.

A regulation prohibited thrifts from making more than $100,000 in unse-
cured commercial loans to their employees, officers, directors, or major share-

34 • INSIDE JOB

holders unless the Federal Home Loan Bank approved. Clearly that was an
inconvenient rule for thrift officers with expensive tastes. How could Hansen
and his cohorts participate personally in the real estate developments and reap
the massive financial rewards they envisioned? A mechanism had to be triggered
to circumvent this regulation. To that end Hansen formed close alliances with
officers at other savings and loans. Immediately money began to flow like artesian
spring water among the main players.

Hansen had an old friend who had become the head of his own thrifts —
Columbus Savings and Loan in San Francisco and Marin Savings and Loan in
nearby San Rafael, later combined to become Columbus-Marin Sa\ings and
Loan. Regulators would later charge that the two men conspired to make loans
to one another in order to circumvent the ioans-to-affiliated-pcrsons regulations.
Before it was over Hansen received three loans totaling $174,000 from Colum-
bus-Marin, loans on which regulators said he was routinely delinquent. Court
documents showed that Hansen's friend received $550,000 in loans from Cen-
tennial, and he then approved a $250,000 line of credit for Hansen at Columbus-
Marin. The FSLIC later charged that Columbus-Marin also loaned $50,000 to
Shah and made at least 14 loans to other Centennial executives, including a
$505,000 loan for Dutch investor and Hansen/Shah business partner Nicholaas
Sandmann.

Another reason to have like-minded thrifts "on the program" was to have a
way to get rid of bad loans, and this was the role Hansen envisioned for Atlas
Savings and Loan in San Francisco. Thrifts routinely sold parts or all of their
loan portfolios to other thrifts. These transactions, called "participations," were
a perfectly legitimate way for the selling S&L to raise cash and the purchasing
S&L to fatten its loan portfolio. But Hansen needed someone to sell his bad
loans to — someone who might miss the fact that the loans had been made to
shaky borrowers on property that was grossly overappraised. In short, Hansen
needed a sucker, and that's precisely what he had in mind for Atlas Savings.
Atlas soon found itself the proud owner of $6.5 million in loan participations
purchased from Centennial, and Centennial had some of Atlas's hard-earned
cash. A year later these participations would turn out to be a package of rotting,
"nonperforming" loans, according to an FSLIC lawsuit. These, plus other loans
Atlas bought from Centennial, ultimately led to Atlas's collapse in 1985.

We would discover as our investigation matured that participations like the
ones Hansen sold Atlas were the AIDS \irus of the thrift industr) . Imiocent
thrifts exchanging loans with a thrift infected by fraud would find months later
that they had picked up some terminally ill loans. Through the use of partici-
pations in the 1980s, the thrift industry spread its problems much more widely
than otherwise would have been possible.

In another case Erv fathered an ally when he had Ccntemiial help i\\o young
Sonoma County brothers, Leif and jay Soderling, break into the thrift industry

Centennial Gears Up for Deregulation ■ 35

by loaning them $1 million of the $2 million they needed to start Golden Paeific
Savings and Loan in Windsor, near Santa Rosa. Centennial promptly paeked
Golden Pacific's management team with people from its own ranks, ensuring
that a close relationship would ensue. And it did.

"Erv just picked up the phone one day and called Jay Soderling, " Beverly
Haines said. "He told Jay he needed $250,000 right away. Jay cut a cashier's
check out of Golden Pacific and drove right over with it." Haines tapped Golden
Pacific for $125,000 (which she said she gave to Erv), and regulators claimed
Shah got at least $1 million.^ All these loans later went into default.

Meanwhile, back at the George Ranch, things were not going well on the
Sandmann loan. Less than a year after getting the $5.4 million from Centennial,
Sandmann was already in default, FSLIC attornies later claimed. Legally, Cen-
tennial could have foreclosed on the project, taking it over for what Sandmann
still owed. But Hansen and Shah interceded on behalf of their friend (and
business partner). Rather than foreclose on the property. Centennial bought it
from Sandmann's company, Damstraat (named for a street in Amsterdam), for
$8.1 million, the FSLIC charged, allowing Sandmann to pocket a quick $3.7
million profit. Centennial then hired Sandmann as a project manager for six
months and paid him yet another $300,000.

In 1983 Centennial moved its corporate offices from Guerneville to Santa
Rosa, an appropriate move for a company quickly becoming a financial power
in Northern California. The thrift bought and remodeled a large office building
downtown on Fourth Street, and the total cost was pegged at somewhere near
$7 million— 30 times the value of its former Guerneville home. Everything at
the new office was first-class: oak, brass, etched glass, box-beamed ceilings,
mirrored walls, plush carpets. There was a board room big enough to jog in
with a conference table long enough to skate on. Western oil paintings graced
the walls and cowboy sculptures stood on cabinets and desks. A five-foot-high
solid crystal horse head dominated the conference room. Finally, Centennial
Savings and Loan executives had the setting and accoutrements that reflected
their ambitions.

But as plush as Centennial's new home was, Hansen and Shah wanted more,
and Shah had just the ticket. Back in 1980 he had purchased an old stone
building on the outskirts of Santa Rosa, county records showed, for about
$150,000. Built in 1909 as a hotel, the building had fallen on hard times and
had last been home to a topless bar. Hansen immediately saw the big-ticket
opportunity in that old stone building. He, Shah, and Sandmann transferred
the property into a partnership they formed called Stonehouse Partners and later
sold it to Centennial for $1 million, "as is. " Erv told Centennial's board of
directors that the old building would make a wonderful headquarters for Cen-

36 ■ INSIDE JOB

tennial Corporation, the new holding company of Centennial Savings and Loan.
Regulators said he did not tell the directors or the regulators (because it would
have been a conflict of interest for him to benefit from the purchase) that he
was one of the Stonehouse Partners.

Then the buying spree really began. Hansen, a renowned ladies' man, had
made the acquaintance of a stunning young woman who fancied herself an
interior decorator. He took an inmiediate liking to her, and the two began a
relationship that ultimately would cost Centennial hundreds of thousands of
dollars. When Hansen needed a decorator for the Stonehouse, according to
Haines, he hired his young friend. Over the next few montiis the two of them
flew often to Los Angeles and Las Vegas, on Centennial's twin-engine Cessna,
on "buying trips." And buy they did. Hansen never required that she submit
invoices for the furniturr and art she bought, Haines told us, but simply had
Centennial pay whatever she submitted in the way of bills. There were antique
desks: Hansen's cost $48,000 and he paid extra to have American eagles carved
on the front; Beverly Haines's, an old French Provincial, cost $12,000 and she
complained that the drawer was too heavy to open. Then there was the $35,000
French Provincial gold-and-silver chess table with an inlaid marble top and
matching gold-and-silver chessmen. Hansen wanted to use it as an end table,
but a couch has two ends, after all, so a second table, a reproduction, was ordered
for an additional $35,000.

In addition. Centennial spent over $1 million renovating the Stonehouse
offices. A full gourmet kitchen was installed so the European chef, hired at
$48,000 a year, could prepare meals for Centennial's business guests. Hansen
spent $90,000 decorating his own office, which featured a full wet bar. The
conference room was appointed with the finest in antique tables, chairs, settees,
and Persian rugs. The building was simply magnificent. Santa Rosa had never
seen anything like it. For those who had known Hansen just a few short months
earlier, it was a disorienting sight.

Hansen m"»'ed the corporate office into the Stonehouse as soon as the work
was completed. But four months later he moved ever\one back to the Fourth
Street building. The Stonehouse proved to be cold and uncomfortable.

"It reminc d me of a mortuary," Haines told us later. It was placed on the
market, but there were no takers for the $2 million white elephant.**

Hansen and Shah then decided Centennial needed a place in San Francisco
where they could entertain out-of-town dignitaries. So they purcha.sed a pent-
house ("a pied-a-terrific," gushed San Francisco columnist Herb Caen) on Lom-
bard Street in San Francisco for $773,487. Again Hansen's interior decorator
friend was employed to redecorate the place, for an additional $150,000.

Hansen wanted Centennial to have a way to chauffeur dignitaries from one
place to the next, so Haines said that Sandmann, by then a Centennial vice
president, arranged the purchase of a 1971 stretch Mercedes limousine for a

Centennial Gears Up for Deregulation ' 37

mere $30,000. Ihifortunately, the car was in Holland. By the time it wa.s re-
trofitted in the U.S. to meet American smog and safety standards, Haines said,
the car cost Centennial $77,000. Paying the bill, though, didn't mean Centennial
owned the car, which FSLIC investigators later discovered was registered in
Hansen's name.

Cars were an obsession with Hansen, and one afternoon he decided to go
out during lunch and kick .some tires. Before tlie afternoon was out he had
purchased five cars for himself and his family: three station wagons, a four-
wheel-drive pickup for his son-in-law, and a snappy Datsun 280Z for himself.
The FBI reported the cars were paid for with an $89,792.42 Centennial Savings
and Loan cashier's check. Hansen called Haines and told her to bring the check
down right away. He told her he would reimburse the thrift later, but the FBI
said he never did.

On special occasions, like weddings and civic events, Hansen made a point
of being seen around town behind the wheel of his 1930s-vintage Rolls-Royce,
for which he paid $137,000. And to ensure they did not feel left out, Hansen
arranged for the heads of each of Centennial's several subsidiaries to receive
brand-new Mercedes-Benzes, except Haines, who requested, and got, a BMW.

"I didn't want a big car," Haines told us.

It wasn't long before these spending sprees caught the attention of the public.
Few knew quite what to make of them, but most people accepted the ostentatious
life-styles of Centennial's top officers as one more piece of proof that the area
was becoming a playground for the rich and famous. Almost everyone felt that
Santa Rosa and the surrounding areas were destined for explosive growth. Look-
ing at all the Centennial glitter, some saw it as the first positive proof that the
boom times had arrived. And if that were so, then perhaps Shah and Hansen
were the vanguards and visionaries who would blaze the shining path to success
and riches for the rest. By throwing money around, Hansen and Haines rose to
positions of considerable prestige in Northern California.

CHAPTER FOUR

$10,000 In a Boot

Er\' Hansen was building Centennial into a center of financial power in Northern
California. But not everyone shared his vision. A small but growing number of
p)eople began to openly express concern about Centennial's rapid growth and
feverish activities. Something was fishy, people whispered. Savings and loans,
"thrifts," were supposed to be thrifty, not splashy, deregulation or not. S&rL
executives were supposed to be staid, dour, predictable, thoroughly dependable
fellows. What was Centennial up to?

The Russian River News continued to nip at Centennial's heels, and in May
of 1983 Hansen gave $50,000 to a small competing tabloid in Guemeville called
The Paper, which was having money troubles. The Paper's manager, Tom Rich-
man, was soliciting financial support from the community to keep his publication
in business. He dropped by Centennial, and Hansen was more than happy to
help out. He paid the first installment — which sources said was $10,000 — right
on the spot.

"Hansen just reached down into his cowboy boot and pulled out a wad of
cash and handed it to him," an FSLIC attornev told us. Hansen later said he
hoped the extra money would tip the competitive balance between the two
publications and put the Russian River News out of business. Fifty thousand
dollars went a long way in a town of 1,700. Richman later described the $50,000
as a gift. Documents filed in a FSLIC suit showed Centennial even considered
becoming The Papers partner.

But Hansen was interested in buying more than good press. Success and
money always attract politicians, and Centennial attracted its share. Congressman
Douglas Bo, JO, a Democrat, came from a small town near Guemeville where
he had been a Haines family friend. A born politician, he was an attorney and
former member of the California state legislature (where he was a member of
the Assembly Unancc, Insurance and Commerce Committee). Centennial was

38

$10,000 in a Boot • 39

quick to lavish attention on Bosco. Bosco's mother was given a job working for
Haines at Centennial, and Shall fiircd a friend of Bosco's to manage Shah's
company, Ijakcvvood F.nterprises.

Hansen, Shah, Haines and various family members were listed as contrib-
utors to Bosco on his 19(S3 and 1984 disclosure statements. In addition, Bosco
borrowed $124,000 from Centennial and $65,000 from Colden Pacific between
1982 and 1984. ' His payments were often late and a thrift executive told us S&L
officers had to call Bosco in Washington to discuss bringing his payments current.
Bosco said the tardiness was caused by frequent moves. In 1984 Bosco used
Centennial's private plane to attend the funeral of a constituent and failed to
report it on his federal financial disclosure form. He said the failure was an
oversight. In 1986 he was questioned by the FBI about Centennial Savings but
he was not accused of any wrongdoing. (An FBI agent told us that if the FBI
investigated Bosco for his relationship with Centennial, they'd have to investigate
all congressmen because they all did the same thing. ) Bosco said his relationship
with Centennial was completely above board, that he never asked them for any
personal favors, nor did they ever do him any. But with powerful friends Cen-
tennial Savings' influence in the community prospered nicely.

One of the more remarkable political relationships that developed at Cen-
tennial was between Sonoma County's chief law-enforcement officer. Sheriff
Roger McDermott, and Hansen. The sheriff was a guest on several flights of
Centennial's corporate plane and accompanied Hansen and others on trips to
Canada and Las Vegas. McDermott also became a partner in a construction
company that was working almost exclusively on Centennial projects, including
a multimillion-dollar condo development in Bullhead City, Arizona, on the
Colorado River about 60 miles south of Las Vegas.

Centennial's sweet scent went out beyond Sonoma County, and like bees
to honey, individuals with criminal backgrounds and organized crime connec-
tions found their way to the savings and loan. For them, we would learn,
deregulation of the thrift industry was the best thing that had happened since
Prohibition poured millions of dollars into their ever-waiting hands.

The first person to raise Pizzo's suspicions was Norman B. Jenson. A slight,
silver-haired man, he was a Las Vegas attorney, but he had various other interests.
He told us later that he had had, for example, significant business dealings with
Sid Shah and Piombo Corporation before Shah teamed up with Centennial.
Jenson had met Shah some years earlier when Piombo was bidding for work at
Murrieta Hot Springs, a project near Palm Springs being developed by Morris
Shenker, owner of the Dunes Hotel and Casino in Las Vegas. (Shenker had
been Teamster President Jimmy Hoffa's attorney and was described by the Pres-
ident's Commission on Organized Crime as an associate of Kansas City organized

40 • INSIDE JOB

crime boss Nick Civella.) Jenson was a potential investor in Shenker's Murrieta
Hot Springs development, and he said he had met Shah when Piombo was
positioning itself to get a construction contract on the project. Jenson also had
real estate investments near Santa Rosa, and he and Piombo had joined in
several joint-venture partnerships.

Soon after Shah became a central figure at Centennial, Pizzo went to the
county recorder's office to research Shah's land holdings and real estate trans-
actions, and he discovered documentation of several local deals between Piombo
and Jenson. Pizzo found Jenson to be a shadowy character who left a confusing
paper trail. He drifted in and out of complex deals in ways that left Pizzo
wondering what was in the deals for Jenson. in many of Jenson 's joint-venture
partnerships with Piombo, Jenson eventually, mysteriously, deeded without re-
muneration his portion of the joint ventures to Piombo. Property didn't seem
to get bought and sold, it just appeared and then got transferred. Jenson was
maddening to trace, always hidden behind several layers of paper corporations
and powers of attorney. To Pizzo he seemed to be acting like a man with a lot
to hide.

Pizzo checked further into Jenson 's past and more questions surfaced. Jenson
had been a principal in the Holiday Casino in Las Vegas, and he and a partner
had held a $1.7 million mortgage on the Shenandoah Hotel and Casino. Evi-
dently he carried some weight in Las Vegas casino circles. A computer search
on Jenson's name coughed up a 1981 United Press International stor>' about the
indictment of two men from New Jersey charged with extortion. According to
the article, Thomas Principe, 49, described by the FBI as "one of the most
prolific hit men on the East Coast," and Dominick D'Agostino, 64, who had
interests in the trucking business, were charged with extorting $300,000 from
two Philadelphia developers. The money, according to federal investigators, had
been extracted under threat of violence to their persons, property, and families
to finance a Las Vegas casino project. The $300,000 was allegedly delivered to
Thomas DiBiasi, an attorney, who then made out a check in that amount to
Norman B. Jenson and his partner, owners of the proposed casino site. (Jenson
later told us he became a government witness in the case.)

As the months went by Pizzo periodically checked filings at the county
recorder's office, but nothing new appeared in Jenson's name, and there was no
evidence to connect him directly to Centennial Savings. His relationship seemed
to be with Shah and Piombo, not Centennial. Not until three years later would
Pizzo get the tip that unraveled the Norm Jenson mystery:

One afternoon in August 1986 Pizzo was sitting in the Russian River News
office reading a recently delivered copy of the National Thrift News. He spotted
a story about the collapse of three thrifts, one in Washington state, one in Texas,
and another in Louisiana, and he glanced through the article, wondering how
such widely separated thrifts might have been related. A name buried on the

$10,000 in a Boot • 41

third page, near the end of the story, jumped out of the gray text — Norman B.
Jenson. The FSLIC was claiming in a lawsuit that the three thrifts had conspired
to make Jenson a $4 million loan on a Las Vegas casino, the DeVille Casino,
for which they said Jenson had paid a $50,000 kickback to the president of the
Louisiana thrift, Guy Olano. The loan later went into default.

The fact that Jenson had been dealing with thrifts in Louisiana, Washington,
and Texas had staggering implications for Pizzo. He had developed a nagging
suspicion that what he was seeing at Centennial might be happening at other
thrifts as well. His suspicion was based on nothing more than the belief that if
a looting were in progress at Centennial, perhaps other thrifts were also being
victimized. He had mentioned his suspicions to state regulators, but they treated
him more like someone reporting a flying-saucer sighting than someone sounding
an alarm. He continued to worry nonetheless. The deals were just too smooth
and too slick, and too much money was disappearing, for this to be no more
than a pack of amateurs fleecing a bank.

The National Thrift News story lent unexpected support to these concerns.
If Jenson was out there working over other thrifts — in a deal that had involved
thrifts in three states — then maybe he wasn't alone. Were there others? Who
were they? Was this a nationwide conspiracy? How bad was it? Could the Mafia
or other organized crime figures be involved? Were they networking? How? How
many thrifts were threatened? Pizzo made some phone calls to defense attorneys
and learned that Jenson's loan had been arranged for him by a loan brokerage
firm in San Antonio, Falcon Financial, owned by loan broker John Lapaglia,
who was in federal prison serving a 14-month sentence for failing to report
$169,000 in income on his 1979 federal tax return. In John Lapaglia we had
our first clue as to how events at several savings and loans might be connected.

Loan brokers put borrowers together with lenders for a commission — and
sometimes a piece of the action. If the borrower were on the up and up, the
broker's service was a service to all. But if the borrower were a crook, the loan
broker knowingly or unknowingly could become a kind of traveling host to that
dangerous virus, introducing it to thrifts from coast to coast. We learned that a
handful of roving loan brokers traveled this country like nomads, putting deals
together. They were the synapse across which both legitimate and illegitimate
business jumped in the thrift industry. When deregulation of the thrift industry
greatly expanded thrifts' ability to invest in multimillion-dollar real estate proj-
ects, it created a gold mine for loan brokers (whose commission was based on
a percent of the loan). Deposit brokers pumped money into thrifts and loan
brokers pumped it out.

Jenson's involvement in the complex DeVille Casino deal put him in a new
light, and Pizzo decided to investigate him more intensely. During a search for
documents relating to Jenson, Pizzo turned up a deed for a Santa Rosa home
that he learned had been the subject of an arson probe by county investigators

42 • INSIDE JOB

after a predawn fire on December 2, 1982. He contacted a count>' fire chief
who had become an important source for him on fire-related news stories, and
the fire chief outlined the facts surrounding the arson. Then Pizzo gradually
pieced together the rest of the story.

Residents in a prestigious hillside neighborhood above Santa Rosa had been
jolted from their sleep by the dreaded sound of fire sirens one night in December
1982. From their bedroom windows they had peered through oak trees at the
glow of a fire that lit up the night sky as it destroyed a three-bedroom redwood
home on Lower Ridge Road. When firemen arrived they had to pr\' open a
locked security gate to get inside, and by that time the expensive home on the
five-acre estate was engulfed in flames. Firemen found no sign that anyone was
at home. Later, when questioned, neighbors told strange stories of a young
couple named Miller who kept mostly to themselves, of limousines with darkened
windows that came and went at all hours of the night, of Doberman pinschers
that roamed the grounds.

Arson investigators determined that someone had set the fire by dumping
gasoline down the hall and stairs. They also discovered that before the fire
someone had thoroughly ransacked the house. Walls had been torn open, floor-
boards ripped up. Fire officials began a records search for the property's owner
and they came up with Jenson and a company in Las Vegas, D.). Investments.
Calls to Las Vegas turned up no D.J. Investments, so they phoned Jenson. When
first asked if he were the owner of a home on Lower Ridge Road, he told arson
investigators he was, but after being told the circumstances that led to the call,
he quickly backed away from his earlier statement, saying that he had been
mistaken, that he didn't have anything to do with the house.

County arson investigators continued to sift through the charred ruins until,
on the third day, federal agents suddenly appeared on the scene.

"There were eight of us investigating the fire," recalled fire investigator Kevin
O'Shea. "These feds called us together and told us our investigation was over.
They told us to forget everything we had seen there, that as far as we were
concerned, it never happened. They even told us to destroy any notes we might
have taken. 'This never happened,' they said." At that point federal agents took
over the investigation.

Jenson continued to refuse comment and no fire insurance claim was filed.
But an investigator told us they discovered a tantalizing clue in the rubble: a
smoke-stained business card that simply read "Morrison Energy International,
Dean Chandler, sales." On the back someone had penciled instructions on how
to work the security gate. Investigators called the Santa Rosa phone number
printed on the card and a secretary answered, "Lakewood Enterprises. " Lakewood

$10,000 in a Boot • 43

was Sid Shah's real estate company. Questioned by arson investigators, Shah
disclaimed any intimate knowledge of Dean Cliandler or Morrison Energy In-
ternational, saying only that he let Chandler use his phone number for messages.
However, Pizzo discovered on a 1982 financial statement prepared by Shah that
he owned "5,804 shares of Morrison Energy International stock, which he valued
at $60 a share. Why was Shah trying to hide from investigators his involvement
with Morrison Energy?

Questions surrounding the 1982 fire at the Lower Ridge Road home grew
as time passed but no answers were forthcoming. The house sat charred and
empty. No one made a move to clean it or fix it. Occasionally federal agents
would arrive at the scene and sift through the ashes. The home's former oc-
cupants, the "Millers," had vanished. Neighbors in the tony neighborhood began
to complain that the place was an eyesore. Their complaints finally forced
Norman Jenson to come forward and assure them the property would be cleaned
up. Who would be doing the work? 'Tiombo Construction Company," they
said he told them.

Going back again and again to his federal sources knowledgeable about
Jenson, Pizzo learned that the burned house, the "Millers," Norm Jenson, and
Sid Shah had become the center of a massive Organized Crime/Drug Enforce-
ment Task Force investigation that had set up shop in the Federal Building in
Santa Rosa. For five years a 12-agency team would investigate a $300 million
international drug ring. Then the U.S. attorney would hand down an indictment
alleging that the ring laundered its money through Sid Shah's and Norman B.
Jenson's complex real estate deals.

Jenson was the first red flag that went up for Pizzo. Then a second warning
flag was raised when Pizzo learned that reputed Mafia associate Richard Binder
had shown up at Centennial's loan window and had borrowed over $1 million.
With Binder had been Dave Gorwitz, a fellow with a long criminal record and
established Mafia ties. Gorwitz was also old friends with Paul Axelrod, according
to mobster Jimmy "the Weasel" Fratianno, who described Axelrod as Morris
Shenker's "banking expert."

Binder's friend Gorwitz had pulled swindles on the West Coast before. In
1975 Gorwitz had made San Francisco headlines when he was caught up in
the high-profile prosecution of California State Senator Richard Dolwig. Dolwig
had lent his name and influence to an advance-fee loan scam run by Gorwitz
and David Kaplan, another minor hood.^ Kaplan turned state's evidence and in
open court described Gorwitz as a muscleman for the mob. Other court testimony
stated that Gorwitz was a financial advisor to Salvatore M. Caruana (described
by federal officials as a highly placed organized crime figure with links to the

44 • INSIDE JOB

Patriarca family).' Gorwitz, "Uncle Dave" to his friends, was convicted and
served four \ears in prison, his second prison term. He had served time earlier
on a counterfeiting conviction.

After serving his sentence in the Dolwig case, Gorwitz headed for Massa-
chusetts, where he became involved with Richard (Dick) Binder in a mysterious
precious metals venture, the Bay State Gold Exchange, which later was the
subject of a Boston Globe investigative piece.

The Globe reported that Binder had started Bay State Gold Exchange in
Plymouth, Nlassachusetts, outside Boston, with an $800,000 grubstake allegedly
provided by mobster Salvatore Caruana. Along with the money, Caruana ap-
parently sent trusted aide Dave Gorwitz to keep an eye on Garuana's new in-
vestment and on Binder. Bay State Gold Exchange was supposed to be dealing
in reclaimed gold and siKcr, but authorities said they believed Garuana used it
as a vehicle to launder money from his drug operations.

Three times a week, the Globe reported. Binder withdrew cash from a nearby
bank, mostly in $20 bills. He \isited the branch over 100 times and withdrew
$8. 1 million from Bay State's checking account in just 1 1 months. He stuffed
it into a brown suitcase and left. Garuana would show up regularly to make six-
figure withdrawals from Bay State's "petty cash" drawer, according to former
Bay State employees. When precious metal prices crashed in 1981 so did Bay
State, not long after a Bay State associate was found shot to death and stuffed
in the trunk of a car. Federal investigators were interested in Binder's activities
at Bay State by that time, but a fire at Binder's home destroyed all of Bay State's
records.

"Bay State emerged from the foam of the sea and dipped back beneath the
waves," one investigator told the Globe.

Binder and Gorwitz left Boston in a hurry after their little "enterprise" ended
in the probing story in the Boston Globe. When Binder and Gorwitz emerged
from the sea of foam to start a new life in Santa Rosa, they were immediately
put under FBI surveillance. Nevertheless, Binder zeroed in right away on Cen-
tennial. Hansen became a customer at Binder's newly opened Santa Rosa jewelry
store, and in November 1982 Binder borrowed $5,800 from him, which bank-
ruptcy records say he never repaid. Between 1984 and 1986 Binder also borrowed,
and then defaulted on, over $'5 million from Gentennial and two other Northern
Galifornia lenders. (Between 1984 and 1986 bankruptcy court documents showed
Binder borrowed $385,000 from Bank of America, $1,151,000 from Gentral
Bank of Walnut Greek, and $1,450,000 from Gentennial.)^

Gentennial might have lost even more to Binder and Gorwitz if a certain
$6 million land deal had gone through. The pair had their eyes on five acres
of land on the outskirts of Santa Rosa. Binder brought Gorwitz in as a "con-
sultant," for which Uncle Dave was to get 25 percent of the action, according
to later court testimony. A lawyer began a draft agreement but Gorwitz insisted

$10,000 in a Boot ■ 45

his name not appear on any of tlie documents, that instead liis interest be hidden
in an offshore corporation. Suddenly the owners of the land backed out of the
sale. Shortly thereafter federal regulators swooped down on Centennial and
closed the thrift (in August 1985), and Binder declared bankruptcy and returned
to the East Coast, his four-year stay in Santa Rosa abruptly terminated.

The Gorwitz connection left little doubt in Pizzo's mind that organized
crime figures, or people with ties to organized crime, were sucking money out
of Centennial.

While Erv Hansen was welcoming borrowers with questionable credit rec-
ords, he was proving there was no end to the ways he could pull money out of
little Centennial. In early 1984, soon after the fabulous Christmas party that
had all of Northern California talking, the board of directors of Centennial
announced that Shah and Hansen would receive kingly bonuses of $818,000
each. The combined amount, $1,636 million, represented nearly two-thirds of
the $2.6 million net profit Centennial claimed for 1983.

Federal regulators would later learn that in reality the $2.6 million "profit"
was an engineered illusion. Hansen had created $4 million in "profits" by
"selling" to Atlas Savings and Columbus-Marin Savings Centennial's interest in
some partnerships it held with Atlas and Columbus-Marin. The sales were
reversed almost immediately in 1984, with Centennial buying the same interests
back from the two thrifts and paying them a profit for their trouble. In other
words, whatever profit Centennial made on the sale in 198? was wiped out in
the buy-back a few months later. The deal fattened Centennial's bottom line at
the end of 1983. This was the stuff bonuses were made of.

But there was nothing phony about the $1.6 million bonus Shah and Hansen
got. With bonuses and salary together, the two had each earned well over $1
million after the first year together as a team at Centennial.'^ Understaffed reg-
ulators had let Centennial go its own way for nearly two years, but the huge
bonuses finally caught their attention and they dubbed them "excessive," stating
that Hansen's compensation was five hmes that of any other thrift president in
the FHLB's eleventh district.''

But even under the hot breath of angry regulators Hansen found a way to
compound his larceny. In response to regulators' criticism of his bonus, Hansen
called Centennial's board of directors together and told them that if his man-
agement contract — which allowed him a salary of $100,000 a year plus a chunk
of the profits (real or imagined) — was going to cause Centennial problems with
the regulators, he was willing to renegotiate his contract. But first the board
would have to buy out his old contract, and he wanted $350,000 for that. Hansen
also demanded his salary be increased to $250,000 a year if he had to give up
profit sharing. Like everything else Hansen proposed, his offer was accepted by

46 • INSIDE )OB

his board of directors. (A former chairman of Centennial's board explained the
board's acquiescence by telling us that whenever the board opposed Hansen, he
became furious and threatened to replace them with people who would do what
he wanted, when he wanted.)

Hansen's new contract, and the $350,000 he extracted from Centennial to
set aside his old one, just added insult to injury and regulators hit the roof. Of
course in 1984 "hitting the roof meant regulators wrote Centennial a letter and
demanded that the board do everything possible to get Hansen and Shah to
return some of their "excessive compensation " The board agreed but regulators
later charged that the board made little or no effort to get the money back, and
regulators soon had other matters to occupy their attentions.

Hansen reveled in his new role as empire builder, even if those empires
were built in the clouds. He formed a Centennial "hunting club " and purchased
$500 shotguns for himself and his covey of rural groupies. He hosted a gala
fishing expedition to Canada, bringing along his drinking buddies and Sheriff
McDermott. After admiring a Western belt buckle he had seen on another high
flier, Hansen had one made for himself Built into the gold-and-silver buckle
was a small pistol that snapped out and could actually fire a .22-caliber bullet.

No deal was too big or too small. During a slow afternoon one day, Beverly
Haines, Hansen, and a business associate purchased a small, run-down rural
house for $40,000. Documents on file at the county recorder's office told us the
rest of the story. The same day the group bought the property they deeded it
back and forth among themselves several times, each time raising the recorded
value. (This maneuver is called a "land flip," and it is illegal if it is being used
to defraud a lender. ) The final deed recorded was a trust deed securing an $80,000
loan from Atlas Savings and Loan on the property. This little impromptu part-
nership had spent a couple of hours signing documents and turned a $40,000
purchase into a $40,000 profit. Kind of a "nooner," financially speaking. Nat-
urally the loan went into default.

On another occasion Hansen, Shah, and Dutch investor Neik Sandmann
paid $50,000 for a two-thirds share of an old stone warehouse near the railroad
tracks where bums jumped freights. County records showed they "flipped" the
property among themselves and their partnership several times, raising the value
each time, and capped off the transactions with a $487,000 loan, again from
Adas Savings. Eventually they defaulted on the loan and regulators said Atlas
had to sell the prop)erty at a considerable loss.

Shah took an interest in mushrooms and he purchased a small mushroom
farm near Santa Rosa, making Hansen and Haines partners in the operation.
Hansen then had Centennial put $1.5 million into a large, bankrupt mushroom
company in Washington state. Regulators claimed Shah's plan was to merge all

$10,000 in a Boot ■ 47

tlic iiuislirooiii operations into one and corner 80 percent of the West Coast
market, but in 1984 he left Centennial holding the bag for $4 million in non-
performing loans to the project and Shah ultimately placed his mushroom em-
pire. Mushroom King, into bankruptcy.

And just where were thrift examiners while all this frolicking in the vault
was going on? Centennial should have been under scrutiny by both state and
federal examiners because it was a state-chartered thrift and a member of the
FSLIC. But the state examination staff had been decimated by the defection of
thrifts to federal charters, and the numbers of examiners on the federal level had
also been cut. In 1980, prior to deregulation, there had been over 700 federal
examiners to cover the country's 4,002 thrifts. But deregulation was interpreted
by Washington to mean there would be less need for regulation, and examiners
had been cut to 679, even though the number of institutions in trouble had
begun a sharp rise.

"Haven't you heard of deregulation?" a frustrated regulator told Pizzo one
day when he called to ask them why they weren't all over Centennial. "We
don't supervise these institutions like we used to."

Since frequent on-site examinations were impossible, regulators often relied
on supervision by mail. Examiners would study records supplied by Centennial
and fire back complaints. "We got dozens of these warning letters," Beverly
Haines later told us. "They'd send us a warning letter on a deal or transaction
they felt was unsound or a violation, and tell us not to do that anymore. Then
they'd say that since it was already done, that at the very least we should go back
and get the board of directors' formal approval for it." For well over three years
that was the extent of the "punishment" handed out to Hansen et al. The
demoralized employees who remained at the California Savings and Loan De-
partment and Federal Home Loan Bank, after staffs were cut, were paralyzed.
Higher up, in the policy-making levels of the regulatory apparatus, the reluctance
of the system to admit it had a self-induced cancer was enormous.

Hansen had his own way of appeasing regulators. He'd hire them. Pat
Connolly, former state deputy savings and loan commissioner, became a Cen-
tennial director, executive vice president, and managing officer in 1984. His
job, in Hansen's mind, was to keep the staff at the state commissioner's office
off Centennial's back, Haines told us. And he was paid handsomely for his
services.

"One minute Connolly was working for the state of California earning
$40,000 a year," explained Haines. "Hansen hires the guy and suddenly he's
pulling down $80,000 a year. In December of 1984, just two months after being
hired, he gets another $40,000 bonus. All he had to do was calm the regulators
down." (Connolly did not reply to our requests for an interview.)

48 • INSIDE |OB

Banks and savings and loans were required to have periodic audits of their
activities. The audits liad to be done by recognized, qualified accounting firms.
Centennial used, first, Alexander Grant^ and, later. Peat, Marwick, Mitchell &
Co. But even though the FHLBB required an independent audit of thrifts, the
tab for the auditor's services was paid by the thrift being examined. Furthermore,
the law did not require the auditor to report irregularities to the FHLBB or law
enforcement but only to thrift management. It was then up to the thrift officers
to take corrective action or, presumably, to turn themselves in if they had broken
the law. This policy resembled requiring a fire marshal to report to Nero that
Rome was ablaze. (During our investigation we heard of several occasions when
thrift officers would offer auditors kickbacks, gifts, or a high-paying job with the
S&L in exchange for a clean audit. If the auditors refused to cooperate, the
thrift would change firms.)

"At Centennial an auditor for the independent auditing firm actually sat in
on board meetings and helped them structure the Pioinbo deal [purchase)," said
Haines. Later the auditor became a Centennial officer. Investigators told us
Centennial eventually hired seven of its former auditors in a revolving-door
pattern investigators said they found troubling.*

With the money flowing at full force. Centennial generated an almost irre-
sistable momentum about it. All who came within its orbit felt that force and
many bent to it. Was Centennial the promise of deregulation realized? Or was
it a hijacked thrift careening out of control? No one seemed to want to try to
sort out the answer to that question during 1983 and 1984. Centennial appeared
successful and powerful, a trend setter, and most people were content to climb
on board and enjoy the exhilarating ride.

CHAPTER FIVE

The Downhill Slide

Everything went Erv Hansen's way at Centennial for nearly two years. When
anyone on Centennial's staff or board of directors dared challenge him, he flew
into a fury of self-righteous indignation. He bragged, cajoled, and bullied his
way through the months. With Beverly Haines running the money desk, brokered
deposits and jumbo CDs poured into Centennial's coffers— and out the other
end. Regulators alleged that Hansen, Shah, Sandmann, and others pumped that
money off into projects of their own. For a time the examiners and auditors,
who were supposed to ensure that precisely this kind of looting never occurred,
seemed not to care. And their former colleagues, who were by that time working
for Centennial, assured them all was well.

But hiring former examiners and auditors wasn't going to keep Hansen's
house of cards together forever, and by mid- 1984 he came under increasing
pressure from regulators who began to make the kinds of noises that Hansen, a
former regulator himself, knew preceded real action. Someone had to take the
fall. Behind the scenes it was somehow agreed to lay the blame for Centennial's
excesses on Shah. Hansen informed the feds that Shah was the problem and
that Shah would resign. Stories were even floated in the local press that Hansen
and Shah had had a falling-out. Shah told reporters he had private interests to
pursue (mushrooms among them). He said he was not the corporate type and
no longer fit in at Centennial. The truth, it was later revealed, was that regulators
had required Centennial's management to sign a supervisory agreement in which
they agreed to cease any dealings with Shah.'

Shah's contract was terminated, but, like Hansen before him. Shah exacted
a price for voiding his contract and, regulators said, took one more dip in
Centennial's pool of liquid assets. Shah received $450,000 for his stock and
$500,000 to buy out his employment contract with Centennial. FSLIC attorneys
later charged Hansen arranged the stock purchase by inducing Centennial's

49

50 • INSIDE |OB

directors, whom the FSLIC would refer to later as "a rubber-stamp board," to
buy Shah's shares. Under the scheme the directors would pay $60 a share for
Shah's shares, $25 in cash and $35 in promissory notes.

Hansen made Centennial lines of credit available to the directors in excess
of the cash amount they needed to purchase Shah's shares. Regulators said the
excess funds were intended as an incentive to the directors to participate in the
scheme. The result was that Shah received $450,000 directly out of Centennial's
coffers for his shares. Later the promissory notes signed by the directors/straw
purchasers were "forgiven" by Shah, regulators charged, thereby relieving them
of that obligation. The FSLIC claimed Shah's departure cost Centennial another
$750,000.2

Despite Shah's sacrifice on the regulatory altar, Hansen's life continued to
get more complicated, even dangerous. In May 1985 Hansen, Haines, and Shah
learned through Hansen's friend Sheriff Roger McDcrniott that two disgruntled
former a.ssociates may have hired a hit man to deal with the trio. Haines said
that on a spring evening in May, after dinner and drinks, McDermott took
Hansen back to the courthouse and swore him in as a special Sonoma County
deputy. He gave him a badge and Hansen began carrying two pistols for pro-
tection. Deputy Erv was born. Hansen had a photo taken of his swearing-in,
which he proudly hung on the wall behind his desk. As for the hit man, no
one ever came forward. (After Centennial's collapse and the ensuing FBI in-
vestigation, it was discovered that sheriff's office files referencing Erv's special
deputy status and gun permit were missing. Sources within the department said
that only a three-by-five, cross-reference card remained to show that a master
file had ever existed. McDermott was not reelected as Sonoma County sheriff,
quietly left office, and maintained his silence on these events.)

For a while Hansen was successful in promoting the myth that all of Cen-
tennial's problems had been cau.sed by the uncontrollable Sid Shah. Now, with
him gone, Hansen said he was "trying to hold this thing together." But by late
spring of 1985 Hansen was telling friends that he expected regulators to remove
him from office — though not before he made one more valiant effort to hold
off Centennial's day of reckoning. Regulators had told Hansen that, to avoid
being declared insolvent. Centennial needed an infusion of $7 million. Un-
deterred, Hansen had another rabbit up his sleeve.

Centennial's wild ride had begun with its purchase of Piombo and, ironically,
would end with its "sale." Hansen announced that he had found a buyer for
Piombo, a buyer who would pay a whopping $25 million for the construction
company, $12 million more than Centennial had paid for it two and a half years
earlier, even though Piombo had been gutted of mo.st of its valuable real estate
holdings during its short stay at Centennial. This "profit" would produce the

The Downhill Slide • 51

cash that regulators were demanding Centennial raise in order to stay in business.
Here for the first time we ran into a tactic that nearly every thrift bandit we met
would employ as a last desperate effort to ward off an FSLIC takeover — the
White Knight.

Pionibo's purported buyer was Sierra Diversified Investments (SDI), head-
quartered in Shingle Springs, California. But when we tried to find SDI we
discovered it had no phone listing or utility company accounts there. Equally
mysterious were SDl's two principals, Dave Bella and Edward Blair. Sources
inside Centennial complained to us that they knew little of the pair except that
"we hear they are in the tire recapping business, or something like that."

Not only did the mysterious company and its owners raise regulators' eye-
brows, but the transaction's terms turned out to be a regulator's nightmare: SDI
would pay only $100,000 in cash. The rest of the $5.75 million down payment
was to be in the form of promissory notes and deeds. SDI agreed to make other
cash installments of $2.6 million in four months and $1.5 million in eight
months. Nineteen million of the $25 million was to be carried by Centennial
as a ?0-year loan.

Regulators sent no weak-kneed warning letters this time. Finally, enough
was enough. They gave Hansen a clear, unmistakable order: Do not consummate
the Piombo sale. But Hansen rushed the sale to completion anyway, quickly
transferring Piombo to SDI. At the closing SDI put up $100,000 and in return
got the keys to Piombo. They also got Piombo's bank accounts, which contained
over $800,000, and Hansen extended $1 million in operating loans from Cen-
tennial to Piombo's new owners. (Several weeks after Centennial was seized,
FSLIC negotiators wrestled control of Piombo back from SDI, but not without
additional cost. Since possession is still nine-tenths of the law, and since Hansen
had given SDI possession of Piombo, the FSLIC had to pay SDI to let go.
According to a source close to the negotiations, the tab was $300,000.)

The Piombo sale was the final outrage. At 5 p.m. on August 20, 1985, a
small army of FSLIC examiners, auditors, and private security guards stormed
Centennial's branches. A representative of the Federal Home Loan Bank Board'
walked up to Hansen, handed him a letter from Washington, and said, "Mr.
Hansen, we are declaring Centennial insolvent. You are hereby removed as
chairman of the board and president. Please give us your keys and do not touch
anything on or in your desk."

If there was ever a moment to call in one's lOUs, that was it, and that night
Centennial's favorite congressman, Doug Bosco, announced from his home in
Washington, D.C., that he was outraged by the Bank Board's action. He said
that he was concerned for Centennial's shareholders and that he knew Hansen
and considered him to be a kind, generous, and humanitarian man. He said he
was going to personally investigate the Bank Board's seizure of Centennial.

Bosco was just one of the first in a long line of congressmen and senators

52 • INSIDE JOB

who would interfere with the regulatory process in the name of constituent
service. Bosco was later forced to make an embarrassing public retraction when
a group of consenative bankers threatened to withdraw their financial support
for Bosco if he did not distance himself from the likes of Erv Hansen. A spokes-
man explained their reasoning: "My feeling is that a legislator should ha\e all
the facts before criticizing federal regulators. Centennial was a high-flying or-
ganization that was headed for trouble for a long time."

The headline in The Paper that week (the tabloid Hansen had gisen SSO.OOO
to, as a "gift") read, "Centennial is dead. Long live Centennial." The paper ran
an editorial that was a eulogy to Centennial written by the publisher.

The day after the takeover Pizzo ran into Hansen in a bar that Beverly Haines
owned in Guerneviilc, and they spent a couple of hours talking things over.
Hansen showed none of the animositv' he had earlier displayed toward Pizzo.
Now he wanted sympathy. Over a beer he sang the blues.

"They came in and fired me," Hansen said. "One little punk looked me in
the eye and said, 'Hansen, we're going to put a number on your back.' No, they
won't, because I didn't do anything wrong."

When the boom fell Centennial had swollen to $404 million in assets, a
1,000 percent increase in just 32 months. Eighty percent of Centennial's $435
million in deposits were high-cost brokered funds in certificates of deposit.'' The
days following the takeover found regulators gasping in horror and disbelief, we
were told, as they picked through Centennial's rubble. Thirty-six percent — $140
million — of all of Centennial's outstanding loans were tied up in high-risk
development ventures owned by Centennial's own subsidian' companies or cro-
nies.

The feds immediately fired Haines and 14 of the thrift's officers. Centennial
was dissolved as a privately held, state-chartered stock thrift and was converted
to a federal mutual, an institution that is theoretically owned by its depositors
and borrowers. At that instant $7 million in stock, owned by 300 stockholders,
some of them Centennial's founders, became worthless. The day after the take-
over Pizzo walked into Centennial's small Guerneville branch and found an
elderly Centennial employee in tears.

"1 should have known," he said. "1 invested every penny I'd saved for
retirement — $50,000 — in Centennial stock, and now it's all gone. I'm too old
to start over. I should have known. It's my own fault. 1 should have known
when Hansen walked by me e\ ery day, never even shook my hand or said hello. "

Centennial became known among federal regulators in San Francisco as the
Eleventh District's "dirtiest thrift" — a reference to what they said they saw as a
sordid and wide-ranging labyrinth of fraud and self-dealing. With every day that
passed the magnitude of the mess mounted. Centennial was $36 million in the

The Downhill Slide • 53

red, then $60 million, $90 million, $1 12 million, and on it went. 'I'he further
examiners looked, the more rot they found. I'here were loan files, for multi-
million-dollar loans, that eontained no appraisals or other required documen-
tation. The FSLIC "SWAT" team found the $48,000-a-year European chef on
the payroll, the company plane that was costing $35,000 a month in tie-down
fees and maintenance, and the San Francisco penthouse. They seized over 25
company cars that ranged from Mercedes sedans to a stretch limo. And the $2
million Stonehouse, filled with European antiques, still sat vacant on the out-
skirts of town.

Hansen retired to his $500,000 home in Santa Rosa while officials began
sorting through the wreckage to determine if any federal laws had been broken.
In a last-ditch effort to salvage his dream, Hansen filed suit against the FHLBB,
charging that their seizure was precipitous and premature. The ease was soon
dismissed and Hansen went back home to spend the next two years brooding in
his Santa Rosa mansion.

On the heels of the takeover an FBI investigative team, specialists in white-
collar crime, arrived in Santa Rosa to investigate violations of banking regula-
tions. Special Agent Pat Murphy, an accounting specialist, and his partner,
Special Agent Ernie Cooper, an attorney, got the thankless task of unraveling
thousands of pages of old loan documents, title reports, deeds, and loan appli-
cations. There were a lot of unanswered questions, and, at that time, no one
was talking.

For ten months the investigation limped along with little progress. The deals
were mind-bogglingly complex, and the chance of nailing someone for clear
criminal activity began to seem remote. Then chance dropped a veritable Rosetta
Stone right in the FBI's lap, and at 8 a.m. on September 3, 1986, Pat Murphy,
accompanied by a woman FBI agent, knocked on the door of Beverly Haines's
magnificent home in Guerneville. A sleepy Haines, still in her bathrobe, an-
swered.

"Beverly Haines," said Murphy, "I have a federal warrant for your arrest for
embezzling $1.6 million from Centennial Savings and Loan."

Haines and an accomplice, who worked as the manager of the headquarters
branch of Centennial in Santa Rosa (he had not been among those fired after
the federal takeover), were taken into federal custody the same day. What was
remarkable about the charges was that the money they embezzled was taken
both before and after the federal seizure of Centennial, while the place was
thick with federal auditors and FBI agents. Haines had become accustomed to
having unrestricted access to Centennial's petty cash drawer, and after she was
tossed out by regulators it hadn't taken her long to figure out a way to keep the
money flowing.

Haines, who had been the young branch manager's boss at Centennial, had
convinced him to aid her in a complex check-kiting scheme.' Over $5.8 million

54 • INSIDE JOB

was missing, though investigators said they could specifically tie only $1 .6 million
to Haines. She had facilitated the complicated fraud by opening over thirty
checking accounts at Centennial and Bank of America." Haines wrote checks
for large sums of money— $145,000, $90,000, $125,000— on her Centennial
accounts and deposited them at Bank of America. She then had Bank of ,'\merica
issue her cashier's checks for like amounts, which she converted to cash. When
Haines's checks came back to Centennial for collection, her accomplice ad-
mitted, he sent the money to Bank of America but hid the checks in his desk
or briefcase so there would be no record that Haines's accounts at Centennial
were grossly overdrawn.

Federal investigators could not say what Haines did with all the money, and
though Haines provided detailed testimony on alleged wrongdoing by others,"
she remained vague about where her money was.

"They just don't understand, " she told us. "It was all just kited checks, there
really wasn't all the money they say there was." But she put those checks to very
real uses. A workout specialist hired by the FSLIC to collect on bad Centennial
loans said Haines even tried to pay off a $50,000 Centennial loan with a kited
check.

"She readily agreed to repay the loan when we confronted her with the
demand," he said. "She was really gracious about it and wrote us a check in
full. What we didn't know then was that she was kiting checks out of Centennial
and so what she did was repay us with our own money. "

Another place a goodly chunk of Haines's money went was into her home
in Guerneville. From practically the day things began to roll at Centennial in
early 1983 until well after the federal takeover in 1985, workmen and craftsmen
worked day in and day out on the Haines home. They transformed a once modest
summer cabin into a luxurious two-story, 3,000-square-foot home suitable for
the pages of Architectural Digest. It had over a dozen handmade stained-glass
windows, three fountains, an ele\ator, a tile workout room complete with sauna,
electrically operated skylights throughout, a sunken hot tub in the master suite,
Italian-marble showers with gold-plated fixtures, suede carpets, and hand-carved
doors. There was even a vault to store furs.

Haines began cooperating with the investigation almost immediately in a
desperate effort to stay out of prison. Perhaps to inspire just such behavior, the
assistant U.S. attorney in charge of the case, Peter Robinson, had Haines,
following her arrest, held over the weekend in the Oakland County jail. Jail was
definitely not Beverly's cup of tea, and when she was let out on bail, the feds'
only problem was keeping up with the furious pace with which she began turning
evidence against her former compatriots. She even agreed to give speeches to
banking executives about bank fraud.

Haines's arrest and decision to turn state's evidence was a severe blow to
Hansen. Acquaintances .said his normally cocky, self-assured demeanor gave

The Downhill Slide • 55

way to an increasingly sullen mood. A heavy drinker, he now indulged even
more." Finally, one night in early 1987, he showed up at Community Hospital's
emergency room with what was reported to be a self-induced drug overdose.
With Haines talking to the feds, and his attorney advising him not to be
seen talking with Sid Shah, Hansen felt isolated and sent tentative feelers out
to the federal authorities to see if he, too, could cut a deal. The question was
met with stony, ice-cold silence, investigators told us. The U.S. attorney wanted
to sweat him out while the FBI debriefed Haines. Four months after the first
suicide attempt, Hansen was rushed to the emergency room a second time.
Friends had found him unconscious in his car, in the garage, with the engine
running.

After being stabilized Hansen was transferred to Oak Crest mental hospital
on a mandatory 72-hour hold. This time federal investigators decided they had
better talk to their prime suspect since he seemed to be going to extraordinary
lengths to get their attention. Assistant U.S. Attorney Peter Robinson, an FBI
agent, and a psychologist met with Hansen at Oak Crest. It was then that Hansen
was given a description of the kinds of charges that would be brought against
him. Some 26 in all were contemplated, including charges that he had embezzled
at least $872,000 from Centennial between 1982 and 1985. The investigation
had revealed that Hansen had routinely used his institution's funds to fuel his
own extravagant life-style, taking $20,000 here, $25,000 there, $55,000 for
antiques, $137,500 for jewelry, $80,000 for his taxes, $85,000 for cars, $25,000
for art, $45,000 for a vacation . . . and on and on (according to documents we
obtained through the Freedom of Information Act). He had arrogantly used
Centennial's treasury as his own personal petty cash drawer.

Hansen was released from Oak Crest and went home to resume waiting for
the FBI to contact him. In the months that followed federal agents continued
to debrief Haines and went right back to giving Hansen the official cold shoulder.
They also handed down 17 indictments of mostly minor figures in the Centennial
daisy chain.

What was left of Centennial was now in the hands of a crack management
team from Great Western Savings and Loan, appointed by the FSLIC. In one
final irony, on January 26, 1987, 18 months after regulators took over Centen-
nial, the FHLB of San Francisco issued a confidential memorandum addressed
"To the Board of Directors, Centennial Savings and Loan." The memorandum
warned sternly, ". . . you may have found evidence of fraud and criminal
collusion by and between former officers, directors, and outsiders, including
professionals such as appraisers, and lawyers. You as directors have an obligation
to review such acts for possible referral to a local prosecutor, or the United States
Department of Justice." By that time, of course, the Justice Department probe
was well under way and the crooks were long gone. So, for any practical purposes,
was Centennial.

56 • INSIDE JOB

Golden Pacific Savings and Loan was seized a month after Centennial, in
September 1985.'' Leif Soderling, the older of the two Soderling brothers, had
resigned as president in February, saying, "I don't want to be in the savings and
loan business. It's got a lot of regulations and 1 don't want to learn them." His
resignation didn't help him avoid trouble, however. In March 1987 he and his
brother, Jay, were charged with loan fraud in connection with a complex series
of land transactions that had netted them $10 million from their own thrift. The
brothers pleaded guilty and were sentenced to one year in prison and ordered
to pay restitution. (Critics of the lack of consistency in sentencing pointed to a
front-page newspaper story about the Soderlings' sentence. On that same front
page was news of another sentence, that of a man who had held a friend's parrot
for ransom and received seven years in prison for the extortion attempt. The
juxtaposition of the two stories led one disillusioned FBI agent to quip bitterly,
"Use a parrot, go to jail.")

Contributing to the Soderlings' light sentence was an eloquent presentation
by the prosecutor. Assistant U.S. Attorney Robinson, who described the brothers
as two young men who "did not intend to establish the savings and loan for the
purpose of ripping it off' but simply took the wrong fork in the road. During
the hearing an attorney for the FSLIC repeatedly implored the judge to take a
stronger stance with the two brothers, saying that evidence indicated that the
pair had secreted some assets away and transferred others to third parties in order
to hide them from investigators. The judge asked the U.S. attorney if this were
so. Robinson replied that his agents had not conducted any search for secreted
assets. (In March 1989, just months after the two brothers got out of prison,
another U.S. attorney would accuse them of secretly receiving payment on a
$800,000 note and spending most of the money on thoroughbred horses, a home
computer, and car phones, in violation of probation, which required that any
money they acquired be used for restitution. The brothers denied the accusation
and the matter was pending as of this writing. The court had reshicted the
brothers to a living allowance of $2,500 a month for themselves and their
families.)

In February 1988 the FSLIC filed a $10 million civil suit against the brothers.
The FSLIC claimed they had manipulated substantial assets in order to defraud
the FSLIC. Evidently the FSLIC didn't buy the Soderlings' tale of woe that Jay
had a minus net worth of $1.5 million and Leif a negative net worth of $1
million. The FSLIC also filed a $100 million civil suit against Centennial's
former directors and a number of former executives. And to round out the group
the FSLIC filed a similar $50 million suit against several former Columbus-
Marin Savings and Loan executives. "*

The Downhill Slide • 57

From information provided by Haines, investigators were finally able to
develop a solid case against Hansen. Investigators said they hoped that, once
faced with the sobering reality of a multicount grand jury indictment and years
in prison, Hansen would give them the evidence against Shah.

Nice idea, and it might have worked. Except that time ran out for the FBI
when, on July 30, 1987 — two years after the feds took over Centennial and just
one day before Hansen was to enter into negotiations with the Justice
Department — Hansen, 55, was found stone dead in bed. Nearly everyone sus-
pected suicide or foul play, so the coroner gave the case special attention. The
official report: Hansen had died of a cerebral aneurysm. A blood vessel on the
right side of his brain had burst while he slept.

A pall fell over the sordid Centennial story after Hansen's death. Shah was
the only major player left unscathed. He had boasted in the newspapers, through
his high-powered lawyer, that he was guilty of nothing more than taking ad-
vantage of good business opportunities. Sure, he'd made a lot of money. What
was wrong with that?

But quietly, behind the scenes, the multiagency investigation into the De-
cember 1982 fire on Lower Ridge Road had continued. Then suddenly, on
October 5, 1987, special agents Pat Murphy and Ernie Cooper met Sid Shah
as he was leaving his Sonoma, California, home — the opulent Spreckles man-
sion, of sugar fame — and hauled him off to appear before a federal magistrate
in San Francisco. The grand jury had indicted Shah, accusing him of being
part of an elaborate $300 million international drug-smuggling and money-
laundering operation that imported marijuana, hashish, and cocaine from Mex-
ico, Morocco, Colombia, and Thailand and that had done the bulk of its business
between 1979 and 1985. Shah denied the charges. The ring was headed, the
indictment said, by Ronald Stevenson, alias Ronald Miller, who had lived in
the expensive Lower Ridge Road house with his wife and child at the time it
was torched. Investigators speculated he had since been murdered in Mexico.

"Sid Shah Indicted" roared the headlines. Santa Rosa buzzed with the news.
The indictment, drafted by the federal Organized Crime Drug Enforcement
Task Force, charged that Shah, Las Vegas attorney Norman Jen.son and others
had laundered the drug proceeds through a complex web of real estate projects,
including some connected to Centennial Savings and Loan and Piombo Cor-
poration. At Shah's bail hearing a prosecutor cited Shah's recent trips to Am-
sterdam to meet with Sandmann as reason to fear that Shah might flee if released
from jail before the trial. Nevertheless the judge ordered Shah released on
$500,000 bail." (The case was pending as of this writing.)

Unbeknownst to Shah, during the lengthy inquiry federal investigators had
secretly recorded a meeting and phone calls between Shah, Norm Jenson, and
Ronald Stevenson's brother, Michael. Shah, Jenson, and Stevenson discussed

58 • INSIDE JOB

ways to best deal with the grand jury, which had subpoenaed records of their
complex real estate transactions. The transcript of the meeting showed Shah
reassuring the others:

"You don't have to worry 'bout me saying anything. Where the money was
coming from, don't worry about that part of it if anything could hurt you guys."

Members of the drug ring began to talk, and transcripts of the interrogations
show they told investigators that Norman Jenson, the man who had done millions
of dollars' worth of business with Piombo, was at the very center of the high-
rolling, international drug operation. One informant, William Olof Henrickson,
told the FBI that Jenson had "mob " affiliations. A confidential DEA source said
Jenson owned his own freighter, which prowled the waters from South America
to Oregon. The informant told investigators that Jenson complained that the
freighter was stuck in South America because it was being watched by the feds
and that Jenson was willing to pay $1 million to anyone who would pilot it back
to the United States. Transcripts showed investigators were also told that Jenson
held drug kingpin Ron Stevenson's properties in his name and in the names of
various shell corporations, and that Jenson used his own Coos Bay, Oregon,
marina as an importation point for millions of dollars' worth of pot and cocaine.
An FBI agent said he was told Jenson had placed the drug ring's vast fortune in
safe havens in Switzerland, the Bahamas, Panama, and Thailand, once with
the help of a Swiss consul general and once with the help of a Thai embassy
employee in Los Angeles.

One technique used by Jenson to launder all this high-temperature money,
a source in prison told us, was to purchase expensive property with a cash down
payment and take out as large a loan as possible on the property. Jenson could
then make the monthly payments on the loan with drug proceeds. The interest
he paid on the loan he simply considered to be the cost of cleaning the
money — the laundry bill. Jenson associates, including Henrickson and Michael
Stevenson, told investigators that 50 percent of the Lakewood Hills development
had been financed by Stevenson's drug proceeds.

How much did the ring launder through Lakewood Hills? an investigator
asked Henrickson.

"Haifa billion [sic] at Lakewood Hills, I think. " he replied. "That's what
he [Ronald Stevenson] told me one time. Five hundred thousand dollars."

A county politician had eased the paperwork for the Lakewood Hills devel-
opment through the county bureaucracy, he added:

"They had the politician in their pocket, one of 'em, you know. And they
could get permits through him and shit like that. "

Later Centennial bought Lakewood Hills, thereby cashing out the asset for
Jenson and the others.

A raid on Jenson's offices in Las Vegas netted investigators a treasure trove
of documentation on Jenson's far-flung enterprises. An in\entor\' of items taken

The Downhill Slide • 59

in that search included paperwork on various real estate transactions allegedly
used to launder drug money (including files on Lakewood Khlls and Jcnson's
deals with Piombo Corporation) and numerous plastic bags and bottles containing
"green leafy substances, and white powders and white powder residues" (ac-
cording to the FBI receipt for property received).

With such damning evidence in federal hands, Jenson agreed to cooperate
with the government in its investigation of the drug ring, Sid Shah, and indi-
viduals at savings and loans in Texas, Washington, and Louisiana. In return
Jenson sought and received partial immunity from prosecution. Then, just before
the drug trial was scheduled to begin, informant Michael Stevenson disappeared.
The drug case was pending as this book went to press.

At this point the wind went out of the Centennial criminal investigation.
The feds' technique of sweating out Hansen had blown up in their faces, and
now that he was dead. Assistant U.S. Attorney Peter Robinson announced he
was going into private practice to become a defense attorney, and the FBI had
to scale back its investigation.'- After 12 years as a federal prosecutor, Robinson
would now defend clients accused of some of the same kinds of crimes he had
formerly prosecuted. In an article he wrote for a legal publication he said his
new clientele gave him something he had not found as a prosecutor:

. . . the feeling I have experienced as a defense lawyer getting a dismissal
for a client is euphoric — and addicting . . . the gratitude for helping one
real person is much greater than I received as a prosecutor helping the public
. . . my days as a champion of the underdog have just begun. It is a daunting
challenge. But I already fee! at home.

In a final twist of irony, Robinson revealed that his new offices would be
located in Centennial's former executive quarters, the Stonehouse.

With his departure the Centennial investigation lost its drive and dribbled
to a close. Beverly Haines went off to Giger Correctional F'acility in Spokane,
Washington, to serve a five-year sentence for embezzling $1.6 million from
Centennial, but in two months she was out, released by Judge Robert Peckham
to a halfway house in San Francisco to perform community service and serve
three years' probation. She was allowed to go home on weekends.

Centennial, born in 1977, finally passed completely from sight in April 1987
when its garments were divided between the FSLIC and Citizens Federal Savings
and Loan of Miami, which paid only $8 million for what was left of Centennial's
"goodwill" and for the right to operate an interstate network of thrifts that would
have branches in Florida and California (interstate banking was forbidden except
when it suited regulators' needs)." In less than five years, from December 1980
to August 1985, when federal regulators took over the thrift, over $165 million
vanished, and no one ever served more than a year in prison for the theft. '^ In

60 • INSIDE JOB

1985 there were 5,995 bank robberies in the U.S. that involved a total loss of
$46 million." But at Centennial alone the heist netted $165 million.

By the time Citizens Federal bought the remnants of Centennial in .April
1987 we were well into our investigation of failed thrifts coast to coast. We had
decided in December 1986 that the evidence Pizzo had collected at Centennial
was too compelling to ignore. We knew we were onto an important storv'. The
strategy we adopted was to approach our investigation in the same way an
epidemiologist would track a spreading virus. We took a random selection of
failed thrifts across the countrv' and examined each to see if we found common
elements in their deaths. We had a theorv' to pro\e or disprove: that "bust-outs"
and other forms of orchestrated fraud were underlying the sudden crisis in the
thrift industrv'. Pizzo and Fricker would work out of an office in Guerneville;
Muolo, out of the National Thrift News office in New York. We spent over two
years on the investigation, years in which we collected bits of information every
day that expanded our understanding of the puzzle we were piecing together.
In the process we imcovered a cast of bank-fraud artists that were working every
single savings and loan we examined. The interwoven relationships astonished
even us, and by the time we completed our in\estigation, in June 1989, our
original hypothesis had been eclipsed by the reality we discovered: deregulation
had unleashed a holocaust of fraud upon the thrifts it had been designed to save.

CHAPTER SIX

Lazarus

When the California legislature deregulated state-chartered thrifts in order to
stem the flow of state thrifts to federal ciiarters after Garn-St Germain passed,
it virtually threw the rule book out the door and made California thrifts irre-
sistible. In one important provision the legislature decreed that a savings and
loan could invest or loan 100 percent of its assets in real estate,' and it set no
standards for the type of property or the qualifications of the borrower. Suddenly
the state was so flooded with applications for thrift charters that almost anyone
who could prove he had the $2 million required as start-up capital got the nod.
Bv 1984 it was easier to get approval to own a California savings and loan than
it was to get a casino license in neighboring Nevada. As a result some people
who might not have qualified to run a casino in Nevada got thrifts in California
instead and ran them like they were casinos.

Toward the end of our Centennial investigation a source close to the Sod-
erling brothers slipped us a copy of a letter the pair had prepared as part of their
plea bargain negotiations with the FBI. The letter outlined what the former thrift
owners agreed to tell the feds in return for a soft sentence. Near the end of the
letter was a cryptic reference to "Robert Ferrante and Consolidated Savings and
Loan. ..." We asked one of our FBI sources who Robert Ferrante was; we'd
ne\er run across the name and the Soderlings' letter did not explain further.-

"Ferrante . . . huh, there's one you should look at," our source told us.
"He's a good example of the kind of business person California's new thrift laws
let into this business. You won't believe it. Go on down to L.A. and look in
the court records . . . that's all I can tell you." When we did research Ferrante
we discovered all that the FBI agent had promised and more. There was no
shortage of colorful information on Mr. Ferrante, in both public records and
the local press. He had first made headlines in 1982.

It was late on a Monday night, April 12, 1982, when Robert Ferrante and

61

62 ■ INSIDE JOB

his trusted aide Raymond Arthun decided to call it a day. They locked up their
office in the Brookside Village condominium conversion project in Redondo
Beach, California, on the outskirts of Los Angeles, and walked to their cars in
the dimly lit office parking lot. Arthun stopped at his car and Ferrante continued
down three spaces to his.

Suddenly Arthun heard a noise. Looking up he saw a man with a sock over
his head leap from behind a bush in front of Ferrante's car. The man ran up
to within a few feet of Ferrante and opened fire on him with a .22-caliber
semiautomatic pistol equipped with a silencer. Ferrante screamed for help but
the would-be assassin continued his work with polished precision, even coming
closer to fire a few last shots into Ferrante as he crumbled to the pavement.
Then the gunman walked briskly out into the parking lot, where he was picked
up by a waiting tan Toyota hatchback.

But Robert Ferrante was not to be killed off that easily. Miraculously, of
the nine rounds fired, only four hit their mark and only two caused any serious
damage. One passed through Ferrante's left thigh and a second lodged in his
chest. The police report showed he told police he knew who had shot him, but
he refused to give them the identity of the attacker. Later, in a sworn declaration
filed in connection with a partnership gone sour. Ferrante claimed he had been
targeted by two former business partners with ties to the Israeli Mafia.'

Less than two years after he lay bleeding from a hit man's bullets, and while
he was publicly involved in a tangled web of civil lawsuits as well as a criminal
case involving bribery of a public official, Ferrante was granted a charter from
the State of California, and approved by the Federal Savings and Loan Insurance
Corporation (FSLIC), to open his very own savings and loan.

What a perfect example of how the once-conservative thrift industry had
changed, we thought. Old-line thrift owners would have been horrified to have
someone like Ferrante as a colleague, almost as horrified as Ferrante probably
would have been to be stuck in such a boring occupation. But now would-be
tycoons like Ferrante were welcome in the savings and loan industry . . . and
S&Ls were no longer boring. Far from it.

Robert Ferrante, an attorney, liked to describe himself as a product of blue-
collar working-class parents, a hard worker who grew up near Los Angeles and
put himself through college and law school. His brother, Rocco, described him
as "one hell of an entrepreneur." Detractors called him a "little arrogant Na-
poleon." He was short — about five feet seven — trim and handsome, and he
exuded the polished corporate image.

In 1972 Ferrante, then 24, married the daughter of wealthy San Fernando
real estate developer Chester Anderson. Anderson owned and operated Day
Realty and Day Escrow Company, with 20 offices and 1 , 500 employees in the
Los Angeles area. Ferrante immediately became a partner with his father-in-law
and the two began investing in condominium conversion projects together. But

Lazarus • 63

the bloom later faded from the family rose and by 1979 Chester Anderson was
suing son-in-law Ferrante and two Israeli businessmen who were partners of
Ferrante in other projects. Anderson alleged in his suit that they had used his
company as though it was their own. The judge agreed, ruling:

"It is clear that the defendants used large sums of Condor Development [the
Anderson-Fcrrante company] money, directly and indirectly. . . . They also
used the credit of Condor Development by pledging proceeds from the sale" of
its projects to guarantee a $1.3 million loan for projects of their own.

The judge also disclosed that Ferrante and his partners had even tried to
handicap Anderson's attempt to recover the missing funds from them. "The
defendants upon being served with the complaint herein decided to take $540,000
of corporate funds which they believed was owing [sic| to Chester Anderson, in
order to prevent him from using that money to finance his lawsuit against them."
The suit was an ugly family affair and got plenty of press in Southern California,
but apparently state regulators missed the stories.

Ferrante's feud with his father-in-law didn't get in the way of his relationship
with his two Israeli partners. The three men continued to do condo conversions
together until they had a falling-out in 1981 and Ferrante went to court to have
their partnership dissolved — on his terms. (The suit was later settled out of court.)
Angry accusations flew back and forth. In April 1982 the masked assassin am-
bushed Ferrante, and a month later he went to court to demand a protective
court order to keep his two former partners away from him.

Ferrante testified that he believed he was the target of an Israeli hit man to
whom his two former partners had paid $25,000 to kill him. lie told the court
that he was repeatedly warned by the pair that they were going to kill him.

"I can recall over 30 threats in the 22-day period prior to the actual assas-
sination attempt on my life," Ferrante told the court. Employees at Ferrante's
office corroborated his contention that someone was out to get him. Robin
Bohannon told the court that in November a man had stormed into the office
looking for Ferrante.

"Where's Robert Ferrante? I'm going to break his head, and Ray Arthun's
too." Bohannon said the man kept yelling that he had a gun and was going to
use it on Ferrante and Arthun. (In 1987 Ferrante's then ex-wife would tell Los
Angeles Times reporters, "It was and still is my husband's policy to take extreme
risks with money, even to the point of nearly being murdered because of its
use.")

Despite Ferrante's accusations against his former business partners, and en-
suing police and private investigations, no one was charged with the attempt on
Ferrante's life. And despite the wide publicity accorded the events surrounding
the shooting, Ferrante's reputation was evidently not sufficiently damaged to
make regulators later question his suitability as an S&L owner.

But there was still more, we found. Ferrante made headlines again in May

64 ■ INSIDE JOB

1983 when the United States attorney indicted former Redondo Beach, Cali-
fornia, City Councilman Walter Mitchell, )r. , for allegedly taking bribes from
Ferrante to gain city approval in 1979 for Perrante's Brookside Village condo
conversion project — where Ferrante was shot in 1982. Voters recalled Mitchell
in 1980 after a public row and a series of newspaper articles on the controversial
condominium conversion issue.

Mitchell, a slight man in his thirties, pleaded innocent. But during his three-
day trial in 198? witnesses told the jury that Mitchell himself had said he was
being paid by Ferrante to get approval for the Brookside Village project. Under
the alleged Brookside Village scheme, Mitchell, a painting contractor by trade,
received lucrative painting contracts on Ferrante-owned construction projects in
return for his help with the cit>' council, the prosecutor charged.^ The jury
convicted Mitchell of mail and tax fraud and sentenced him to a year and a half
in prison. (In 1988 Mitchell's mail-fraud convictions were overturned on appeal
when the court ruled that officials could be convicted of mail fraud only if the
fraud cost the government money or property. The tax-fraud conviction was
upheld.)

To the end Mitchell denied he had accepted bribes from Ferrante, and the
district attorney dropped that aspect of the investigation. Later, FSLIC investi-
gators learned. Consolidated made $52,000 in loans to Mitchell's wife while her
husband quietly served his sentence. And when Michell got out of jail, he went
to work for Ferrante in Hawaii, according to exhibits filed in a FSLIC lawsuit
m 1988.

Ferrante's problems did not occur in private. We found \olumes written on
his exploits, both in public records and in the press, but apparently none of this
verbiage had filtered up to the green eyeshades of state and federal regulators
when, in 1983, Ferrante applied for a state charter for his own savings and loan.
Regulators may not have heard of him, but he had certainly heard about de-
regulation and he now wanted his own S&rL. The processing of Ferrante's
application for Consolidated Savings Bank proceeded without a hitch, thanks to
California's new ultraliberal savings and loan regulations passed just that year.'

So at the very time that Ferrante's relationship with Redondo Beach City
Councilman Walter Mitchell was being investigated and openly discussed in the
press during the Mitchell trial in May 1983 — prompting a public rehashing of
the 1982 murder attempt on his life and the 1979 lawsuit filed against him by
his father-in-law — Ferrante's application to run his own thrift sailed through the
application process. Even Ferrante's application for FSLIC insurance coverage,
a separate step requiring federal approval, progressed uneventfully. Federal Home
Loan Bank Board spokeswoman Martha Cravlee later explained that FBI checks
of prospective thrift or bank owners might turn up prior criminal convictions but

Lazarus • 65

would reveal nothing on current investigations, and Ferrante had never been
convicted of anything.

Ferrante's apphcation was a perfect example of one government hand not
knowing what the other hand was doing. "I'he U.S. attorney had subpoenaed
every document in my office with Ferrante's name on it," recalled one senior
loan officer in Southern California. "That was at the same time the state and
the Federal Home Loan Bank were considering his application for a savings and
loan and FSLIC insurance. Somebody wasn't talking to somebody else."

Ferrante later said of the approval process, "I assumed they checked me out
thoroughly." Not so.

The California Savings and Loan Commissioner's office approved Ferrante's
application in May of 1983. At the dawning of 1984 Consolidated also received
the blessing of the Federal Home Loan Bank Board when, after the FHLBB's
"investigation," it approved Ferrante's new thrift for FSLIC insurance. The next
day, February 28, 1984, Consolidated opened its doors for business. Ferrante
now owned his own money machine. He would serve as chairman of the board
until December 7, 1984, whenhegavethatposition tobankcrOttavio A. Angotti.
Ferrante would remain the sole stockholder throughout the thrift's short life.

Consolidated Savings Bank's offices first were located in a shopping center
in Brea, about 30 miles east of Los Angeles. "It was basically a post office drop,
a storefront, not like a real bank at all," recalled a reporter who covered the
opening. Eighteen months later Ferrante would move his bank to Irvine, in
Orange County, 30 miles south of Los Angeles, into a fancy three-story building
in Douglas Plaza, adjacent to Orange County's John Wayne Airport.

Firmly in the saddle, what Ferrante needed now was to fuel Consolidated
with deposits as fast as he could. Like Erv Hansen at Centennial, Ferrante turned
to deposit broker Mario Renda and First United Fund, even though Consoli-
dated's application for a savings and loan charter had said Consolidated would
be a hometown thrift filled with passbook savings accounts. But passbook savings
were small and took time to build up, whereas brokered deposits came with a
phone call and gave thrifts all the money they wanted when they wanted it. An
FHLBB examination revealed that 16 months after Consolidated Savings opened
for business, 70 percent of its savings deposits would consist of brokered and
jumbo ($100,000) certificates of deposit, much of it from Mario Renda's First
United Fund.

With the brokered deposits rolling in. Consolidated had all the money it
needed. Regulators later complained that Ferrante bellied right up to his own
loan trough to get some of those deposits for his own projects, the largest of
which was a 157-acre landfill at the southern edge of Los Angeles called the
Carson landfill. Years earlier the property had been a dump for the city, and
the state considered it a toxic waste site. Nevertheless over the next few months,
according to an FSLIC lawsuit, Ferrante would arrange to have Consolidated

66 • INSIDE JOB

loan just over SH million on the propcrt)' through a confusing maze of com-
panies he had formed and controlled. Many of the Carson loans were obscurely
noted on Consolidated's books as simply "sundry debit items,"'' federal examiners
reported.

Ferrante's right-hand man at Consolidated was its president, Ottavio Angotti,
who had been born and raised in Italy and who had come to the U.S. in 1957.
He still spoke with an Italian accent and when angry sometimes slipped into
Italian. It was Angotti who was left to do battle with suspicious examiners wanting
to know where those several million dollars in "sundrN' debit items" were going
and what interest Ferrante had in the Carson project. When we interviewed
Angotti by phone two years later, he told us he hadn't been hiding anything
from anybody.

"The examiners, both state and federal, were auditing the bank at the very
time we were doing this," Angotti said, his Italian accent growing thicker with
each angry word. "They saw all those debit items. How can they say we were
trying to hide anything?"

The $15 million Carson loans only slightly exceeded regulators' $100,000
limit on unsecured commercial loans to affiliated persons and also immediately
put Consolidated Savings in violation of the loans-to-one borrower regulation,
regulators claimed. (The Carson loans, according to FSLIC reports, were three
times Consolidated Savings' reported net worth and consumed a quarter of its
deposits.) Despite the $15 million that was headed into the Carson project,
Ferrante never developed the property," maybe because of its continuing problem
as a toxic waste dump.

Perhaps anticipating the wrath of regulators, Ferrante decided to "participate
out" (sell) some of the Carson loans to other institutions.* Ferrante arranged
these participation deals with United Federal Savings and Loan of Durant,
Oklahoma, and Savings Investment Service Corporation (also known as SISCorp)
of Oklahoma City, a loan brokerage firm.' The key figure in Consolidated
Savings' deals with United Federal Savings and SISCorp was Charles Bazarian
of Oklahoma City. Bazarian was described by one former savings and loan
executive who knew him well as "an original piece of work. "

In Charlie Bazarian we came face-to-face with one of the most active con
artists working the thrift circuit coast to coast. As our investigation progressed
we were stunned by the number of times we would be sifting through the ashes
of a failed thrift and come across a Bazarian deal.

Bazarian was not an Oklahoma native. He was a Connecticut Yankee, the
son of an Armenian immigrant produce salesman. Charlie was a living caricature
of a tycoon, an obese, gregarious fellow, five feet nine inches tall, 245 pounds,

Lazarus • 67

who eventually had to have quadruple heart bypass surgery. He chewed expensive
handmade cigars and had never bothered to clean up his nialapropisnis and bad
grammar. He and his wife, )anice Lee Bazarian, were well-known figures in
Oklahoma City society. Friends said Charlie had a need to associate with the
great and near great. On one occasion the couple arranged for their friend Las
Vegas entertainer Wayne Newton to perform free at a benefit for their favorite
charity, a rehabilitation center for the mentally handicapped. On another oc-
casion former heavyweight boxing champ Muhanmiad Ali, who was visiting for
a few days at the Bazarians' home, stopped by the center and signed autographs
for the patients.

Charlie and Janice were great party givers. Every year Bazarian, whom friends
had nicknamed Fuzzy, threw an elaborate birthday party for his son, nicknamed
Buzzy. Buzzy, born in 1982, was only a baby, but the guest list was a Who's
Who of Oklahoma City. One year Fuzzy, in Buzzy 's honor, had an entire circus
set up on the vast lawn of his 19,000-square-foot, $2.4 million mansion. At one
end of this lavish spread the Bazarians reportedly had an indoor swimming pool
with a retractable dome ceiling and a waterfall. The Bazarians listed as assets art-
works worth $100,000 (including one jade boat appraised at $65,000), $775 worth
of exotic fish, and a $60,000 Rolls-Royce Camrogue. Bazarian had a Rolex watch
(gold with diamonds) worth $15,000 and an economy duplicate worth $1,000.
Janice had a go!d-nugget-and-diamond pendant that cost $1,500 and Charlie
countered with his $1,500 sapphire-and-diamond cufflinks. But the rca/ Charlie,
we speculated, was the $1,700 gold-and-diamond oil-well belt buckle.

For someone living such an exalted life-style, Bazarian had a most unlikely
history. He quit school after the eighth grade. In the 1960s, already the father
of three children, he moved his family to Oklahoma and worked as a restaurant
cook. Later he got into the insurance business and by 1977, when he was 37,
he had his own insurance company.

"He couldn't do enough for his family," a brother-in-law told a reporter.
"He would give you the shirt off his back."

Well, maybe. But his generosity didn't extend to his clients. In the 1970s
he and associates set up an insurance company that agreed to pay up to $1
million in lifetime medical benefits to clients who paid the $30 membership fee
and the monthly insurance premiums, but no one ever bothered to set aside
any money to pay the medical claims. In 1978 he pleaded no contest to felony
charges of mail fraud. Prosecutors charged that he and his cohorts bilked 700
farmers and ranchers out of more than $347,000 in fees and premiums. Bazarian
was sentenced to four years in prison, which was reduced to four years' probation
in exchange for his testimony against his partner, who was convicted and sent
to prison.

Bazarian immediately filed for bankruptcy, claiming to owe $276,000, in-

68 • INSIDE JOB

eluding $24,000 in unpaid Las Vegas hotel-casino bills. In June 1979 tJie bank-
ruptcy trustee determined that Bazarian had no assets at all and he was forgiven
his debts. Five years later he was chairman, CEO. and sole shareholder in CB
Financial, a company purportedly worth $141 million.

"Charlie is a very entrepreneurial person," said Sig Kohnen, who started
CB Financial with Bazarian in 198?. "He has picked himself up by the boot-
straps." Unfortunately they were attached to someone elses boots.

CB Financial was Bazarian's baby. He told us the company borrowed money
from thrifts and re-loaned it to investors in real estate partnerships, some of
which were tax shelters. Bazarian formed some of these partnerships himself,
and in those cases he was loaning to his own limited partners. He made part of
his profit by charging his borrowers more for the money (in interest and fees)
than the thrifts charged him for the money. But Bazarian got double duty out
of his investors. He took the notes they signed when he made them loans and
either .sold the notes at a discount or pledged them as security for more loans
from thrifts and banks.

Charlie had a veritable perpctuai-motion money machine going. The more
loans he made to his investors, the more in\estors' notes he held that he could
sell or pledge for more loans, an arrangement that appeared to us to closely
resemble a Ponzi scheme. At its height CB Financial had a total debt approaching
$200 million. Bazarian used some of the money to buy stock in savings and
loans as one way to win the hearts and minds of lenders, according to his associate
Sig Kohnen. In 1985 Bazarian owned $15 million of stock in at least nine
institutions. Among the lenders he did business with were United Federal Savings
and Loan and SlSCorp (the two companies Ferrante would soon sell loans to).

When, in August 1985, Ferrante wanted to dispose of some of the $15
million in Carson loans, Be\erly Hills loan broker .\1 '^'arbrow introduced Fer-
rante to Bazarian. Again we saw what a critical role loan brokers like John
Lapaglia (who arranged loans for Norm Jenson) and Al Yarbrow played in the
thrift crisis. They found willing lenders for needy borrowers, and for the intro-
duction the broker received a commission based on a percent (usualh' 2 to 5
percent)"' of the loan. The shakier the borrower or deal, the higher the com-
mission. Some loan brokers, looking for crazy lenders, traveled the country with
their briefcases stuffed with crazy deals.

Al Yarbrow was a particularly well-connected loan broker. ha\ing been in the
business since the 1960s. He was a bright, articulate, distinguished-looking man in
his fifties, over six feet tall. A conservati\e dresser, he projected the classic corporate
U.S.A. image. Those who did business with him said he worked hard, was always
well prepared, and gave the impression of being a real professional.

Be that as it may, in tiic late 1960s Yarbrow was charged with diverting over
$300,000 from his Bradley Mortgage Company's impound accounts. The money
had been paid to Bradley Mortgage by homeowners who had arranged their

Lazarus • 69

FHA mortgages through Bradley, and it was supposed to be used to pay insurance
and property taxes, histead, Varbrow had used the money to finance his other
business ventures. Nearly 400 homeowners got a rude surprise when the tax
man informed them that their property taxes were delinquent. We learned that
Yarbrow repaid the money as part of an arrangement with the Los Angeles
County prosecutor.

When Yarbrow introduced Ferrante to Bazarian in 1985, Charlie sent Fer-
rante over to United Federal Savings and SISCorp. United Federal Savings
agreed to buy $3 million worth of Consolidated Savings' Carson loans and
SISCorp agreed to purchase $5 million more. The ice thus broken, Ferrante
and Bazarian found a number of ways to do business together. Along the way,
regulators said, $3. 5 million disappeared. As FSLIC attorneys later described
the deal in court. Consolidated had agreed to buy a package of loans from
SISCorp and had sent $3. 5 million to Bazarian to forward to SISCorp. SISCorp
said they never got the money. Consolidated didn't seem to care, regulators said,
and did virtually nothing to recover the money.

Even while he was wheeling and dealing with Ferrante, Bazarian was build-
ing onto his house of cards. His CB Financial empire, fed on loans and enmeshed
in complicated financial transactions, began to collapse when in 1986 federal
tax changes sharply reduced the allure of the kind of tax shelters Bazarian was
offering his investors. Bazarian was sued at least 16 times in Oklahoma courts
in 1986 by people who claimed he owed them more than $77 million. " Bazarian
claimed his problems were caused by federal thrift and bank regulators who
sabotaged his growing empire. But in a moment of candor he also admitted to
us, "I just borrowed tremendous amounts of money. ... I just had an appetite
that was absolutely incredible for, you know, money."

When regulators stopped thrifts from making loans to Bazarian's operation
and began suing him for recovery of old loans, his wife literally broke into song.
Janice Lee Bazarian fancied herself a singer, and in 1986 she recorded, with
her group, "Janice and the Deadbeats," a song they called "FDIC" about the
horrors of dealing with hard-hearted bank regulators. Sung to the tune of
"YMCA," made popular by the Village People, the chorus went:

F-D-I-C,

It's time to pay to the F-D-I-C.

They can have everything that you signed and agreed

You can hang out in bankruptcy.

F-D-I-C.

It's time to pay to the F-D-I-C.

You can get yourself clean, you can make an appeal

Your bank is gone and these guys won't deal.

(copyright 1987, u.sed with permission of Janice Lee Bazarian)

70 ■ INSIDE JOB

By May 1987 more ofBazarian's schemes were catching up with him. Vernon
Savings and Sunbelt Savings, hvo Dallas institutions, and Borg- Warner Accep-
tance Corporation, an industrial lender in Chicago, tried to force Bazarian into
bankruptcy, asserting claims of over $16 million. When Bazarian and CB Fi-
nancial finally agreed to the involuntary bankruptcy in October, a long list of
thrifts and banks lined up to sue for recovery.'- Among them was Consolidated
Savings Bank (then in the hands of regulators), which said Bazarian had defrauded
the thrift of $12.3 million." CB Financial was about $90 million in debt.
Bazarian estimated his personal debts totaled about $108 million, which included
Las Vegas gambling debts of $469,000.

But Bazarian didn't let these problems affect his life-style. In the same year
he and Janice Lee bought a new home in Oklahoma City. Bazarian didn't say
what he paid for the house but two years earlier, in a hotter real estate market,
it had been on the market for $2 million. From his new home Bazarian com-
plained expansively to reporters that people were bringing him great deals but,
because of all the charges swirling around him, he couldn't find a bank willing
to lend him money. Friends said Bazarian was just misunderstood, that he was
well-meaning but too trusting of others and too eager to make deals. Even an
assistant LI.S. attorney admitted that Bazarian had charm: "He'sa very endearing,
charming fellow. He has a way of becoming very likable. "'''

Try to tell that to the process server hired by the FSLIC to ser\e a subpoena
on Bazarian in relation to his deals with Consolidated. According to testimony
during court proceedings the process server made numerous trips out to the
Bazarian mansion with no results. Then when someone finally did come to the
door, they were two thugs brandishing guns. The process server ran to his car
and sped off, only to look in his rear\iew mirror and sec that the two men were
following in their car. A half-hour, Hollywood-style car chase through the streets
of Oklahoma City ensued. The process server was finally able to lose his pursuers,
and he returned home to tell the FSLIC to find someone else to ser\e Bazarian.
A FSLIC attorney told the story to a Los Angeles judge who quipped, "That's
the way they do things in Oklahoma."

Consolidated Sa\ings' Chairman Angotti claimed he had been misled about
Bazarian and wished he'd never heard of him. "We had no information about
his former criminal activities," Angotti claimed. "If we had, we wouldn't have
done business with him." Angotti said he belie\ed there was a darker side to the
Bazarian affair. "I was fooled and defrauded by more than Bazarian. I was
defrauded by the Federal Home Loan Bank itself. When 1 contacted them to
get a reading on SISCorp and Mr. Bazarian, those sons-a-bitches just told me
that he [Bazarian] was okay. They let me walk right into that thing because you
see I was a pain in the ass as far as they were concerned. The Federal Home
Loan Bank boards of Topeka and San Francisco, they framed me. They ruined
the good name of Ottavio A. Angotti.""

Lazarus '71

(In 1988 a baiiknipfcy court trustee alleged tiiat Bazarian had been secretly
transferring assets to trusts for liis children and concealing them from the trustee.
Later Bazarian reached a settlement with the trustee in which he agreed to
relinquish his Oklahoma City mansion and many other assets to satisfy creditors.
The trustee did agree, however, to let the Bazarians keep the copyright to Janice's
song, "FDIC")

By mid-1985, a little over a year after opening for business, Ferrante had
made a big dent in Consolidated's bottom line. Finally federal regulators were
eyeing him nervously. They conducted an examination of the S&L's books,
which they claimed showed major inconsistencies between Consolidated's rec-
ords and the facts:

1. Consolidated said 84.8 percent of its loans were mortgage loans se-
cured by real property; the truth, according to examiners, was that
52.7 percent of its loans were unsecured commercial loans, a majority
of which were in excess of loans-to-one-borrower limitations.

2. Consolidated said it had no brokered deposits; the truth was that at
the time 70 percent of its deposits were brokered and more were
pouring in every day.

3. Most of Consolidated's loans were to 15 borrowers, most of whom
regulators reported had suspiciously close ties to Ferrante.

4. The net worth Consolidated reported included substantial noncash
assets of questionable value.

5. Loans lacked adequate documentation and Consolidated had no writ-
ten formal loan policy and procedures.

Given the extent of Consolidated's alleged infractions, we wondered why
regulators let the thrift continue to operate for a year after the examination. The
answer, we learned, was that regulators had lengthy procedures to follow, and
they had to proceed in an orderly manner. "" 7'he modus operandi in the banking
world was not to panic. Panic was the 'T" word of banking. Instead, there were
careful, measured steps to be followed, calmly, quietly, and secretly, of course,
so the public wouldn't panic.

Besides, Ferrante and Angotti weren't making it particularly easy, or com-
fortable, for regulators to examine Consolidated's books. Immediately following
the critical June 1985 examiner's report, the regulatory apparatus tried to lurch
into action, issuing a series of directives, restrictions, and cease-and-desist orders
designed to jawbone Consolidated Savings into compliance. As a result Chair-

72 • INSIDE JOB

man Angotti, who was increasingly called upon to placate Consolidated's FHLB
supervisory agent, particularly on the Carson deal, began harassing bank ex-
aminers. Eventually things got downright personal and came to a head when
Angotti allegedly threatened federal examiners "with grave bodily harm including
death."'"

Depending on whose version you believe, the threat was either sinister or
semi-sinister. According to one FHLB examiner, Angotti threatened to kill him.
Regulators contended similar threats were made to another auditor as well. A
public relations firm hired by Ferrante following the 1986 federal takeover of
Consolidated Savings Bank told us it was ail a big misunderstanding.

"Mr. Angotti is Italian," PR woman Sherry Twamley explained in a soft
voice. "After weeks of struggling with federal regulators, Mr. Angotti just got
angry one day and, instead of swearing at them in English, did so in Italian. If
you translated what he said literally, it meant 'I'm going to cut your balls off.'
But really," she added, "he's just a 'Mr. Harmless Professor.' "

Angotti agreed with Sherry 1 wamley's version of his threats, but he added
that after his suffering at the hands of regulators he might have strengthened his
threat. Angotti complained that they seemed obsessed with the "Mafia" and one
federal examiner made constant allusions to Angotti's heritage and the mob.
"He used to ask me all the time if I was taking my instructions from the Mafia, "
Angotti said incredulously, adding in his Italian accent that if he had known
then what regulators had in store for Consolidated, he would have "eaten their
blood."'"

Angotti also speculated, "I think the state and feds had approved Robert for
Consolidated but missed all the stuff about the bribery case and shooting and
stuff. When they discovered it Consolidated had already been appro\ed and I
think they were just trying to force him out because their investigation of him
didn't turn any of this stuff up."

Ferrante, in a counterclaim filed against the FSLIC, claimed that "Angotti,
representing the new California-based S&Ls, arguing forcefully for the rights of
an S&L to engage in all types of profitable commercial activities, including
commercial lending," was anathema to FHLBB Chairman Ed Gray, who rep-
resented the interests of "the club," or the long-established large thrift institutions.
Ferrante claimed that Ed Gray, in Washington, and regulators at the San Fran-
cisco FHLB conspired to "destroy Consolidated and Ferrante and Angotti,
thereby removing them as political forces within the industry." He said the
FSLIC colluded with newspapers and the media in a maniacal mission to destroy
him.'"

Whatever their reasons. Federal Home Loan Bank examiners ftom San
Francisco continued to hound Angotti. They were cutting their way through
the maze of partnerships, limited partnerships, trust assignments, and promissory

Lazarus ■ 73

notes Consolidated had erected around the Carson project. Ferrante later alleged
in court documents that from November 1985 the thrift was hardly doing any
banking at all. Instead, management and staff^ spent most of their time trying to
satisfy regulators through two bank examinations, one agreement promising to
correct any problems, eight meetings, and at least 41 long letters of instruction
accompanied by hundreds of pages of documentation.

In what Ferrante characterized as a thoroughly unreasonable action, regu-
lator Polly Cortez advised the FHLBB in February 1986 not to approve Ferrante's
application to own another savings and loan. Then in March federal examiners
began what would turn out to be the final inspection of Consolidated Savings'
books. They later reported that Angotti, pushed for answers to embarrassing
questions, again resorted to threats. He called examiner Darrell De Castro into
an office to complain about the examination. The more Angotti talked, the
more frightening his rhetoric became.

"If they want to fight, I can fight," Angotti vowed, according to De Castro.
"And I don't lose. No one is going to close this bank. If they do, I will have to
be dead. I mean that literally. And if they shoot me, I will have to shoot someone.
And I hope it's not you." Unamused by Angotti's "Godfather" imitation, the
FHLB asked for, and received from the court, a temporary restraining order
barring Angotti or any other Consolidated official from interfering with exam-
iners. Regulators returned with armed guards from the U.S. marshal's office,
just for good measure. Left to do their job without distractions, regulators soon
found the institution was insolvent.

On May 22, 1986, at 4 p.m., agents of the FSLIC pushed through the doors
of Consolidated's new offices in Irvine and took control of the thrift. They were
accompanied by FBI agents, some carrying automatic rifles, and local police.
By now they were very familiar with the story of the Ferrante shooting incident,
his claims of Israeli Mafia involvement, and. Angotti's blunt threats to their
examiners. FHLB attorney Bart Dzivi later testified they had also been warned
by local law enforcement that there was an ongoing investigation into Ferrante's
alleged links to organized crime.'" Under those circumstances the green-eye-
shaded regulators weren't about to walk in armed only with calculators.

Angotti was offended by his treatment that day. He said the FBI agents who
accompanied the federal regulators held machine guns on him and the bank's
tellers and also manhandled him personally.

"They came into my office and threw me up against the wall and frisked
me," said Angotti. But Angotti had not been exactly caught off guard by the
raid. Five hours earlier a reporter acting on a tip had called him.

"I hear they're going to shut you guys down today. Any comment?" the
reporter had asked.

There was stunned silence on the line, and then Angotti blurted, "Oh, shit!

74 ■ INSIDE JOB

Thanks!" and hung up. (In 1986 and 1987 the reporter received a Christmas
card from Angotti. In 1987 the card carried the simple message "Again, thank
you. belated thanks. — Ottavio A. Angotti.")-'

When the FSLIC team arrived at Consolidated's offices that afternoon,
attorneys for regulators claim they found three large trash bags filled with shredded
bank documents. Fifteen minutes after the takeover they found a bank official
still frantically shredding. Regulators claimed later that other important docu-
ments were smuggled out the back door to Consolidated's corporate office even
as the thrift was being seized.

While regulators secured Consolidated Sa\ ings' Irvine office. FBI agents and
Bank Board officers simultaneously stormed the Newport Beach office that Fer-
rante shared with his attorney, Eric Bronk. A Mexican standoff ensued, with
Bronk maintaining that neither Consolidated Savings nor Ferrante had any
records at his office. While Bronk stalled, several people left the building carrying
briefcases. Eventually Bronk went into a back office and after a long wait,
regulators said, he returned with a single Consolidated-related file. After further
altercation he repeated the process and produced another file. This stalling action
continued for a couple of hours, during which time Bronk produced about half
a dozen Consolidated files.

Finally examiners decided to call it a day and continue the next. It was late
in the afternoon and everyone was tense and tired. Both sides were clearly
standing their ground. But before they left the examiners had the locks changed
on the doors, and they posted a Pinkerton guard outside for the evening. Then,
just as everyone was filing out to their cars to leave, Ferrante suddenly appeared,
walking out of a back office and, without saying a word, driving off. He had
been there, apparently, the entire time, FSLIC's attorneys claimed.

Things didn't get any better the next day. Bronk/Ferrante associates scurried
around clicking flash pictures of arriving FSLIC clerks and examiners. They
also took photos of their license plates and leajjed into the air to click pictures
through the windows. Nervous FSLIC employees went to court and obtained
another restraining order, in which they said they feared the photos were going
to be used to track them down at their homes.

Bronk loudly, and occasionally physically, protested the search of his offices,
and finally a restraining order had to obtained by the FSLIC against any further
interference from Ferrante or Bronk. Bronk filed an $8 million lawsuit claiming
"unlawful search and seizure." It was easy to understand why Bronk was upset.
In the nine months prior to the takeover, court records show. Consolidated had
paid him $1.2 million for legal and consulting fees and personnel, travel, en-
tertainment, and office expenses.

When Superior Court Judge Richard Gadbois, Jr. , listened in court to FSLIC
complaints of photographing, threats, and interference, he warned the attorneys
representing Ferrante, Angotti, and Bronk, "If I get downwind of any serious

Lazarus ■ 75

suggestion of aiiytliiiig like this, I'll be all over that thing like a eheap suit, and
I really mean heavy." And in the event any FSLIC employees were actually
harmed in any way, the judge warned, "You think you've seen FBI agents. . . .
Judge Web.ster" and I had a little talk and I'm dead serious about that."

With the place to themselves, regulators quickly discovered just how bad
things were at Consolidated. The total cost to the F'SLIC would exceed $100
million, and regulators amassed enough evidence to file a civil suit against
Ferrante, Angotti, Bazarian, and others for $52 million, the amount of money
they estimated was missing. " Ferrante claimed he didn't have any of the contested
millions and never had. The FSLIC spent hundreds of thousands of dollars on
attorneys, seeking recovery from Ferrante and 19 other defendants. Some out-
of-court settlements were reached, but such settlements fell within the Bank
Board's veil of secrecy and were not made public. Sources told us pennies on
the dollar were the norm. Meanwhile, Ferrante sued the FSLIC and the Bank
Board, charging that they, not he, had ruined Consolidated.

"These guys remind me of the kid who killed his parents and then complained
that the system should be kinder to orphans," said one federal prosecutor about
Ferrante and other thrift officials who complained loudly when their thrifts were
seized.

The FSLIC notified Ferrante that the U.S. attorney's office and the FBI
had opened an investigation in the wake of Consolidated's failure, but as of the
day this book went to press, no criminal charges had been filed and the money
was still listed among the "disappeared." As for the regulators' efforts to rescue
Consolidated, well, it's one thing to hold out hope you can catch a horse once
it's out of the stable, but it's quite another to know what to do when the horse
has already been rendered into glue. Consolidated Savings Bank had been bled
white and could not be saved, and on August 29, 1986, regulators closed Con-
solidated Savings, claiming in their civil suit that Ferrante had used the thrift
as "a slush fund for himself, members of his family, and various business as-
sociates." The stock, all held by Ferrante, was rendered worthless and Consol-
idated's wretched ruins were merged with a healthy thrift.

In a desperate attempt to stop state-chartered thrifts from switching to federal
charters after passage of Garn-St Germain, California had thrown its arms open
to all comers. "If you think that federal hussy is easy, come on up and see me
sometime, " the sign might as well have read on the door to the California savings
and loan commission. Character, experience, and intentions of an applicant
played little role in the commission's decision to grant an S&L charter. California
officials were concerned primarily with starting the flow of contributions back
to the politicians and assessments back into the state's regulatory apparatus. Larry
Taggart, the state's new savings and loan commissioner, epitomized the laissez-

76 ■ INSIDE JOB

faire mood of the time. He believed firmly in deregulation and apparently never
met a thrift applicant he didn't like.

Asked in 1989, during his testimony before the House Banking Committee,
how it could be that he approved 235 thrift applications in just 400 days in
office, Taggart responded that he had no way of knowing how a person would
do as a banker until they had tried. "How many of the thrifts you approved later
failed?" Taggart was asked. "Take your pick. Congressman," Taggart responded.

As a result California, particularly Southern California, would lead the
nation in aggregate losses at FSLlC-insured thrifts. To Consolidated Savings add
Beverly Hills Savings, San Marino Savings, South Bay Savings, North American
Savings, Ramona Savings, Westwood Savings, Butferfield Savings, Centennial
Savings ... 42 institutions failed in California between 1980 and 1987. (The
closest competition for "most failed thrifts" came from Illinois with 33, Texas
with 32, Louisiana with 29, Florida with 21, Ohio with 19, and New York with
18. ) And more was yet to come. When thrifts began to collapse in large numbers
in the mid-1980s, federal and state officials tried to blame the failures on a
depressed oil economy. But in California oil played a very minor role in the
state's robust business climate, yet thrifts nevertheless failed.-'' The oil excuse,
we suspected, was a slippery way of avoiding the real issue — fraud.

CHAPTER SEVEN

Back in Washington

The important role played by deposit brokers in the epidemiology of the disease
spreading through the thrift industry was becoming clear to us. Someone had
to make huge deposits into thrifts so high rollers would have money to wheel
and deal with. Local depositors were not a good source of money. Their accounts
were often small and their balances fluctuated and were undependable. Deposit
brokers, on the other hand, were totally dependable. If a thrift executive needed
$2 million or $20 million deposited at his institution Monday morning, deposit
brokers got it there. All the thrift had to do was guarantee to pay the highest
interest rate offered that day. If someone were going to take the risks associated
with defrauding a thrift, they would want to make sure the thrift had enough
money to make it worth their while. Deposit brokers could make that guarantee.

By January 1984 Ed Gray, after eight months as chairman of the FHLBB
in Washington, had become deeply worried about brokered deposits. He felt
something needed to be done to limit them, and the solution he favored was to
severely limit FSLIC insurance coverage of brokered deposits and thereby dis-
courage their placement at thrifts. Gray called his friend Bill Isaac, then chairman
of the FDIG, and asked him if he shared his concerns. Isaac told him the Penn
Square Bank fiasco was all the proof anyone should need.' Together the two
men mapped out a course of action that they knew would not be popular with
either the indu.stry or the Reagan administration. They planned to implement
joint regulations that would strictly limit insurance coverage on deposits acquired
through deposit brokerage firms.

As Gray saw it he was just doing his job — protecting the industry from a
clear and present danger. After all, he reasoned, this wasn't the first time the
FHLBB had limited brokered deposits. From 1963 to 1980 the Bank Board had
forbidden a thrift to get more than 5 percent of its deposits from deposit brokers.
The limit was enacted when thrifts on the West Coast used brokered deposits

11

78 • INSIDE JOB

in the early 1960s to fuel rapid growth and to fund risky investments — the very
characteristics that were worrying Gray now. The FHLBB had repealed the 5
percent limit in 1980 when thrifts were having a hard time attracting deposits.-

Gray and Isaac cemented their alliance against brokered deposits, however,
and on January 1 5, 1984, the two men publicly proposed regulations that limited
to $100,000 the amount of insured deposits any one money broker could place
at a thrift or bank and still get federal deposit insurance coverage. Two months
were set aside for public comment on the proposed rule and they soon had over
165 replies (about a fourth of the replies were form letters issued by major
investment houses in opposition to the regulation). Responses were running two
to one against the proposal, but many small S&Ls favored the rule. They feared
brokered deposits were threatening the safety and soundness of the banking
system. Many said they had no difficulty raising enough deposits without resorting
to deposit brokers. Steven A. Grell, president of First Bank in Pipestone, Min-
nesota, said, "I have had many deposit brokers contact me concerning either
buying or selling certificates. I find their business totally unjustified and haz-
ardous to a federal insurance system." But most S&L officials objected to the
regulation as penalizing all institutions for the abuses of the few.

Gray said he also faced stiff opposition from Treasury Secretary Donald
Regan. Regan was the administration's most adamant champion of deregulation,
and Gray's stand on deposits quickly earned Gray the tag of the great "re-
regulator" among thrift industry lobbyists. Gray was not turning out to be Regan's
idea of a team player. Regan was chairman of the Depository Institutions De-
regulation Gommittee (established by the 1980 Depository Institutions Dereg-
ulation and Monetary Gontrol Act to phase out all interest rate controls).
Before coming to serve in the Reagan administration, Regan had headed the
New York brokerage firm of Merrill Lynch, which later would become one
of the nation's largest deposit brokers. Many came to refer to Regan as the
father of brokered funds.' Now Regan's healthy stallion was about to be gelded
by Gray's proposed regulation. Gray said later, "It seemed like almost every
week the DIDC [Depository Institutions Deregulation Committee] is having a
meeting and taking more of the wraps off. The money brokers began multiplying
like crazy, and the growth was going like crazy, but there was no capital to
sustain it."

According to Ed Gray, when Regan got wind of Gray's plan to rein in deposit
brokers, he told Treasury Deputy Secretary R. T. McNamar that, Republican
or not, old friend of the president's or not, "Gray has got to go." But Regan
couldn't personally attack Gray. Regan's connections with Merrill Lynch were
all too well known, as was the fact that brokered deposits were one of his favorite
subjects. Instead, Regan put McNamar to work on the Gray problem.

McNamar was the complete antithesis of Gray. He was a slick, buttoned-
down dresser who wore pin-striped suits and looked more like an investment

Back in Washington • 79

banker than a government official. Gray, the son of a tractor salesman from
i'exas, occasionally wore loud sports jackets and looked imcomfortable even in
loose-fitting suits.

McNamar picked up the phone and called Gray. They spent seven hours
on the phone tliat day — during which Gray said McNamar tried every argument
he could think up to c()n\ince Gray he should forget his brokcrcd-dcposit reg-
ulation. For seven hours McNamar talked, and talked, and talked. And for seven
hours Ed Gray, like an old farm mule, didn't budge. Gray believed McNamar
was lobbying more for Don Regan than reflecting the administration's position.
Regan did not respond to our requests for an interview, but Gray said he heard
later that Don Regan was furious with him. The difference between the two
men was a fundamental one: Gray wanted the S&L industry to specialize more
closely in what they knew best, home lending; Regan wanted to make thrifts
just like banks. As a deregulator, Regan talked a lot about level playing fields,
where all businesses were created equal and only the strongest survived. But
evidentK he didn't talk to Gray at all. Gray said Regan never once returned his
calls during Gray's four years in Washington.

A few nights later, on January 30, 1984, less than eight months after taking
office, Ed Gray stayed late into the night typing away at a speech he would give
the next day to lawyers attending a conference of the National Council of Savings
Institutions (NCSI). The lawyers represented both banks and savings and loans.
Gray, who had started out as a reporter for a small radio station in Fresno,
California, always wrote his own speeches. He chain-smoked as he tapped away
on his typewriter. He was no doubt smoking a cigarette when he wrote that
brokered money was "like a spreading cancer on the federal deposit insurance
system."

The next day, with dark circles under his eyes from the night's work. Gray
delivered his speech to the lawyers. Standing behind a podium at the Capital
Hilton, he first took a deep breath. Then he prefaced his speech by saying, "I
want to make it clear that as a champion of the free enterprise system myself, I
am not against anybody making a fair profit." But by this time word had leaked
that Gray had been unmoved by all attempts to change his mind on brokered
deposits, and the audience knew the next word out of his mouth would be but.
Before he even got to that point a couple of the lawyers sitting in the back of
the room got up and left. Gray was "off the reservation, " a term Don Regan
used to describe anyone in the administration who did not toe the party line.

Gray was able to deliver his speech uninterrupted by any annoying applause.
After all, most NCSI lawyers made a living representing thrift executives who
took a free market approach to the S&L business. They didn't like being told
by Gray that the brokered deposits fueling their enterprises — some of them from
men like Mario Renda, who had brokered millions of deposits into Centennial
and Consolidated — were bad medicine. (At the time over $34 billion in brokered

80 • INSIDE JOB

deposits were at work at FSLIC-insured institutions. ) And they didn't like Gray's
opinion that the money was being used for risky in\estnient schemes. Or that
such easy money might encourage fraud.

Industry leaders were dumbfounded at Gray's remarks. They had thought
he was their guy. "These f)Cople wanted me in the job because they thought I
was going to be their patsy," Gray would tell us later. He was supposed to be
on their side. Now he was embarrassing them. There could be only one expla-
nation and the word spread quickly — Ed Gray was a buffoon. Even some old-
timers on the Bank Board staff thought he was "off the reservation. " They began
to refer to him around the office as "Mr. Ed, " a reference to television's talking
horse. And what was he talking about? The terrible condition of the FSLIC.
His own staff went out on damage control, telling Washington reporters, "Ed
doesn't understand that brokered deposits are not the problem." Some staffers
said even worse — that he didn't understand finance and was unqualified for the
job. One told us. "It's an outrage he was ever appointed." But to Ed Gray this
was not a complicated matter. And he did, too, understand brokered deposits
— all too well.

But getting a handle on them would not be easy. There would have to be
a fight, and the next salvo came directly from Merrill Lynch, which a week
later released a report to the press that was critical of Gray's regulation. Edson
Mitchell III, a young, fast-talking Merrill Lynch VP, told reporters he was going
to follow Ed Gray around until the ban was overturned.

If all this uproar cau,sed Gray to doubt for one moment the wisdom of his
brokered-deposit regulation, those doubts didn't last. Within days of the Merrill
Lynch news conference. Gray sat in the darkened board room at Bank Board
headquarters, with Bank Board members Mary Grigsby and Don HoNde, and
watched the videotape of the vacant, crumbling 1-30 condos built with loans
from Empire Savings and Loan near Dallas. Grigsby, in her early fifties, was a
Texan who'd worked in the S&L business most of her adult life. She couldn't
believe her eyes. A hundred million dollars of Empire's money, just rotting away
in the Texas sun. Empire had been a tiny $20 million thrift that grew almost
overnight to $330 million, using brokered deposits. The Board voted immediately
to fire Empire's chairman, Spencer Blain, and close Empire, the first closing
that regulators admitted was caused by fraud in the thrift industry's 50-year
history.^

When the videotape was over Gray watched it again. Over and over he
watched it. Empire Savings was the embodiment of cvervthing he had feared
might be wrong with the way thrifts used brokered deposits for risky, sometimes
fraud-ridden, ventures. Gray showed the tape to his entire staff, including those
doubting Thomases who had back-stabbed him to the press just days earlier. He
told us he even called his friend Paul Volcker, head of the Federal Reserve
Board, and Representative Fernand St Germain, House Banking Committee

Back in Washington • 81

chairman, to his office for a screening. He must have shown tiie tape thirty
times.

Now Gray was ready to take his message directly to the industry itself He
chose the upcoming U.S. League's annual convention to make a speech on the
evils of brokered deposits. Less than two years earlier delegates at this convention
had gushed for Gray to be their next F'HLBB chairman. He knew only too well
his reception this time would be far less pleasant, but so be it. Brokered deposits
were destroying the industry, and the LI.S. League and its members had to wake
up before the damage was irreparable.

The night before Gray was to speak. Gray said U.S. League President Wil-
liam O'Gonnell begged him to water down his brokered-deposit regulation.
O'Connell, in his early sixties, a slight man with a tuft of silver hair around his
ears, was a seasoned lobbyist who employed a mildly persuasive manner. His
consistent refrain to Gray was that the S&L industry needed to buy time and it
was Gray's job to help. The League thought that maybe the ban was "a little
too tough," O'Connell told Gray. Although the League's members weren't crazy
about their growing dependence on short-term brokered funds and would offi-
cially support Gray's brokered-deposit regulation, O'Connell told Gray they did
like the idea of being able to use long-term brokered funds (deposits of a year
or more). Could Gray maybe amend the regulation to allow for long-term
brokered deposits? But the next day Gray made his speech: brokered deposits
were trouble, all of them, long and short. They were an accident waiting to
happen. He announced that the ban was on and would continue unchanged.
He hadn't budged.

His intransigence infuriated many in the industry, especially deposit brokers
and the thrift executives who were using the brokered deposits. They were tired
of Ed Gray. He was becoming a broken record on the subject of brokered deposits.
To make matters worse, he had begun to rattle on in public, airing even more
of the industry's dirty laundry, telling people that the FSLIC might run out of
money if thrifts kept failing and that thrifts would have to pay higher FSLIG
insurance premiums. O'Connell and other industry leaders also became uneasy.
Gray was talking too much. Much too much. He was making people nervous.

Members of the Reagan administration started to wonder just how this loose
cannon had gotten on deck. And the answer, some felt, was revealed a few weeks
later during hearings to confirm Ed Meese as the nation's new attorney general.
Testimony quickly focused on Meese 's friends and favors, particularly sweetheart
loans Meese had received from Ed Gray's old thrift. Great American Eirst Savings
Bank of San Diego. In the late 1970s Great American had loaned $120,000 on
Meese's home in California. Then when Meese moved to Washington to be
the White House counselor upon Ronald Reagan's assumption of the presidency
in 1981, Meese bought a home in Virginia with the help of a $132,000 Great
American loan on his California home. Combined payments on both homes

82 • INSIDE JOB

(totaling $51,000 a year) were more than Meese could handle on his $69,800-
a-year salary, and for 1 5 months he made no payments to Great American on
the California home. Nevertheless, Great American did not foreclose. In fact,
the thrift loaned Meese another $21,000 as a fourth trust deed on the house,
for a total of $273,000 in loans on the Galifornia house. A Great American
spokesman said the home had been appraised for $335,000. However, that
appraisal was never borne out by the marketplace. The house finally sold in
1982 for $307,500.

Nearly everyone involved in the Meese home loans got a job with the
administration. Gordon Luce, Great American Savings president, was appointed
a delegate to the United Nations. In May 1983 Ed Gray landed the job of Federal
Home Loan Bank Board chairman. Thomas Barrack, a wealthy Southern Cal-
ifornia developer, helped to locate a buyer for Meese's California house and was
later appointed to a high post at the Interior Department. John McKean, who
arranged two Meese loans totaling $60,000, was appointed to the U.S. Postal
Service Board of Governors. Meese said none of these appointments had anything
to do with the favors Great American Savings had done for him on his house.

However close Gray might have been to the top men in the Reagan White
House, his role in the flap over brokered deposits had turned one of the most
powerful men in the administration, Donald Regan, into an enemy. The Wash-
ington meat grinder went to work on Gray. Stories about Gray's lack of intel-
ligence circulated from office to office like bad jokes.

The fact that Gray was an absentminded professor only added fuel to the
rumor mill. White House Spokesman Larry Speakes had two favorite Ed Gray
stories. In one he told about Gray's bad habit of losing cars. Gray would sign a
car out of the motor pool, drive it to the airport, and then forget about it. When
he returned from his trip he'd call a cab. Suddenly the motor pool noticed they
had a half dozen cars missing, and a check of the airport parking lot turned
them up right where Ed had left them.

In another case, so the story went. Gray was visiting the California legislature
with a lot on his mind, as usual, and as he left he failed to notice a handwritten
note on the elevator door: "Do Not Go to the Basement." Oblivious, Gray got
on the elevator and pushed the button for the basement . . . which was flooded.
Those waiting for the elevator above could hear Gray yelling for help as the
elevator doors opened and the water rushed in on him.

And the tales went on and on. Gray heard about the stories, the Mr. Ed
jokes, Don Regan's complaints to the president that Gray was not qualified for
the job, and worse. But Gray was sure he was right. Everywhere he looked, it
seemed, he saw brokered deposits fueling furious growth at once-modest little
thrifts. The more deposits poured into an institution, the nuttier became the

Back in Washington • 83

deals that the thrift's executives sanctioned. Champions of brokered deposits
contended that Gray was simply watching the free market at work, efficiently
transferring money to areas where it was needed. Brokered deposits weren't
fueling fraud, they argued, they were fueling enterprise, innovation, growth.
Now was not the time, they said, to get cold feet on the road to a deregulated
America.

Gray was not convinced. "I believe in Reaganomics," he said, "but this isn't
what I had in mind."

CHAPTER EIGHT

Tap-dancing to Riches

Deregulation of the interest rate that thrifts could pay to attract deposits in 1980,
combined with the increase in insurance co\erage to $100,000 per account and
the removal by the Bank Board of any limits on brokered deposits, certainly
revitalized the deposit brokerage business. Between June 1981 and June 1982
brokered deposits at savings and loans increased fivefold,' and in the next four
months they went from $15.6 billion to $26 billion. Among the businessmen
profoundly affected by the new deregulation was Mario Renda, who in 1980
became a deposit broker. Until that time he had been a man searching for a
way to get rich. Through the years he was always where the money was, as, for
example, in the mid-1970s during OPEC's- heyday, when Renda had made
several trips to Saudi Arabia to insert himself into the orbit of the world's most
notorious deal-maker, Adnan Khashoggi.

One day in 1977 Mario Renda, then ^6, walked through the gates in a
concrete wall on a narrow street in barren downtown Riyadh, Saudi Arabia. He
crossed a small desert yard to a low stucco bungalow where a Sudanese servant
silently motioned him to enter. He stepped into a living room that resembled a
Holiday Inn converted into an oriental suk (bazaar). Dozens of men in Western
business suits or flowing caftans and kaffiyehs milled around the smoky room
or sat at the several tables littered with ashtrays and ashes. Obediently, Renda
found a seat and settled in for a long wait.

A native New Yorker, Renda had arri\ed in Riyadh with a plan in his pocket
to build precast concrete homes in Jidda, Saudi Arabia. He was a partner in
IPAD (International Planners and Developers) Construction Consortium and
wanted to build an empire on OPEC's purse strings. At that time Khashoggi
was at the apex of his power.' The world's businessmen were rushing to his

84

Tap-dancing to Riches ■ 85

home in Riyadh, a jumble of added-oii bungalows where Khashoggi held court
24 hours a day when he was in town"' and made multimillion-dollar commitments
the way a teller makes change. A nod from Khashoggi could set a man up for
life.

Rcnda sat among that international gathering, described later that year in
Fortune magazine, and waited his turn to make his pitch. Patiently he worked
his way through the labyrinth and into Khashoggi's realm. When it came Renda's
turn for an audience, he and Kiiashoggi reportedly closed a $5 million joint
venture to build the concrete homes in Jidda. Renda went home a happy man,
fancying himself an international financier.

The deal later fell apart, as did so many of Renda's highfalutin plans, but
the collapse did not derail Renda's determined march toward a Khashoggi life-
style. He didn't want to run a construction company. He wanted to be a mid-
dleman, a broker like Khashoggi who claimed to have made $575 million in
the past six years by simply doing deals. Renda coveted expensive possessions,
ostentatious displays of wealth, and life on easy street.

"He wanted somewhere where he could park his Rolls-Royce, tell a few
jokes, make a few phone calls, and go home and say he had a hard day at the
office, " Renda's IPAD partner Sy Miller said later. "He just came here to make
phone calls. " In the winter Renda reportedly kept a chauffeur-driven limousine
running all day in front of the office to keep the car warm. He told Miller he
wished he could put a big sign on one of his Rolls-Royces announcing the car
cost $120,000 and then drive around New York City. "He said he wanted the
world to know what it takes to own one of these and that he had it," said Miller.

In 1980 Renda would become the ultimate "middleman" when he created
First United Fund and became a deposit broker. Being a deposit broker would
be his ticket to that good life. It would also earn him the reputation as the
Typhoid Mary of the savings and loan business.

Raised in the Queens section of New York, Renda had always had an
entrepreneurial bent. He dropped out of Queens College, where he was majoring
in music, to open his own tap-dance school on Long Island. By 1963 he owned
and operated a music summer camp in the Berkshire Mountains in the northwest
corner of Massachusetts. It seemed an idyllic life, but it was the slow lane as
far as Renda was concerned. Bright, complex, charming, and lazy, Renda wanted
more out of life. Suddenly, in 1975, he announced he was closing his camp
and moving on to bigger and much better things. He told the owner of the camp
next door that he had discovered a way to make real money. Within six months
Renda went from tap-dance teacher to international financier. In 1976 he became
partners with Sy Miller at InternaHonal Planners and Developers (IPAD), a
Panamanian-chartered company that Renda said provided "international fi-

86 • INSIDE JOB

nancing on major private and governmental construction projects throughout
the world."

He was a sweetheart of a guy. " Miller said. Renda would have the office
staff "rolling on the floor laughing" at his stories. He seemed to be Mr. Whole-
some, vcr\- straight, never told dirty jokes. He was a director on the executive
committee of the Boy Scouts of America. But he wasn't much of a businessman.

In 1977 he closed the deal for IPAD with Khashoggi at Riyadh. Miller wasn't
impressed. "Khashoggi was a big bullshit broker. He v\as a S3 bill." Later. Miller
commented, "They ate a lot of rice and lamb, but Khashoggi, like Renda. sold
blue skies." The deal never materialized, nor did any of the other big-shot deals
Renda supposedly negotiated on his overseas trips for IP.^D. Renda loved to
hobnob with the rich and famous and that's apparently what he did on IPAD's
expense account. Miller later said. "I would be a wealthy man today if we had
nailed down some of the things we had going at the time. " Instead, in Julv
1977, soon after Renda's trip to Riyadh, Renda left IPAD.

But IPAD had not been a total loss for Renda. He had made valuable contacts
in the Arab world while tra\cling in Khashoggi's circles. Khashoggi also repre-
sented for Renda the kind of life he wanted for himself. He wanted to be a big
shot, at the center of all the action, making deals with the wave of the hand,
making or breaking the lives of others. Khashoggi, Fortune magazine reported
in 1977, viewed himself as a J. P. Morgan or John D. Rockefeller. That probably
sounded all right to Renda too.

After leaving IPAD, Renda spent a short time as a treasurer of an Arab bank
(Arab International Bank), an offshore banking operation used to handle millions
in Arab petro-dollars. At Arab Internationa! Bank he first learned the possibilities
inherent in certificates of deposit (CDs) — information that would soon come in
very handy.

Renda didn't stay long at Arab International Bank. In 1978, eager to strike
out on his own, he formed Arabras, Inc., a one-man firm in New York City.
The name of the new firm suggested Renda planned to continue to capitalize
on his association with cash-rich Arab friends. The company's SEC filing said
it would be doing business in the twin worlds of international finance and trade.
But in 1980, when the U.S. Congress deregulated interest rates on savings
deposits. Renda saw possibilities that transcended even the wealth of the Arabian
oil sheiks. The new legislation was a boon to investors, who could then get a
high return that was risk free (because the deposits were insured by the FSLIC).
No doubt remembering what he had learned at .Arab International Bank, where
the bank's deposit brokers moved petro-dollar CDs around the world in search
of the best daily interest rates, Renda grasped the full implications of interest
rate deregulation. He quickly changed Arabras. Inc.. to First I'nitcd Fund and
became a deposit broker. Before his arrest in 1987 he would broker $6 billion
(buy $6 billion in CDs) for 6,500 investors into 3,500 financial institutions.

Tap-dancing to Riches ■ 87

Rcnda started First United Fund in Januarv' 1980 with only $146,000 and
two employees. (Forty-eight months later it would boast assets of $227 million,
a brokerage business of $5 billion, an annual income of $5 million, and 100
employees.) To get First United Fund off the ground, he needed a steady flow
of deposit money, lots of it. Renda's break came one day when he went to a
local computer store to look for a computer for his new office. He later testified
that while he waited for the salesman, another customer, Martin Schwimmer,
struck up a conversation. Renda soon learned that Schwimmer managed pension
funds for two New York unions. Local 810 of the International Brotherhood of
Teamsters, Chauffeurs, Warehousemen and Helpers of America and Local 38
of the Shcetmetal Workers International Association. The two men retired to a
nearby McDonald's for coffee, and that was the start of a beautiful friendship.
Before Ronald McDonald could pour them a second cup, the deal was struck.
Renda hired his very new friend, Schwimmer, to be financial advisor to his First
United Fund, promising him $50,000 a year according to Schwimmer. (Later
Schwimmer would report he made $400,000 in his first year with First United
Fund and at least $1 million a year for the next three years.) Thereafter the
advice Schwimmer gave to the union pension-fund bosses was to let First United
Fund invest their money in certificates of deposit. In the following months
Renda's network of banks and thrifts grew as he aggressively placed deposits for
his new "clients."

Teamsters Local 810 had 7,000 members, who were employed as wireworkers
and factory workers in Manhattan. Federal authorities later charged that its bosses
agreed to throw their brokerage business Renda's way in return for kickbacks.
The Sheetmetal Workers Local 38 had 650 members, employed as sheet-metal
workers in New York and Connecticut. Their bosses didn't even know Schwim-
mer was putting the local's money at First United Fund. All they knew was that
they had a financial advisor and he was investing their money somewhere.
Between December 1981 and December 1984 the two locals invested about $100
million through First United Fund.

Renda had found a nice niche in the newly deregulated world of federally
insured certificates of deposit. Using other people's money, he could get a percent
of the action just by opening what amounted to savings accounts for them and
collecting his commission from savings and loan officers, who were grateful for
the deposits. Why would anyone work for a living when he could be a broker?
But Renda and Schwimmer had an idea for a way to make an even larger profit
from this arrangement. They told the 16 savings and loans and two banks that
received this pension money to deposit their fees ($16 million over three years)
in bank accounts that Renda and Schwimmer then kept secret from the IRS.
(Though they didn't have to share with the IRS, Renda later admitted that he
and Schwimmer did kick back a portion of their take to Teamster officials.)

With millions of dollars at his disposal, Renda began to act like a sheik.

88 • INSIDE JOB

Built like a fireplug, he had a platform installed in his office to elevate his desk
so guests had to look up at him: "Power Desking." His office was described by
one source as "a monument to bad taste, " garish and ostentatious, with red
velour wallpaper. He moved his family into a ?0-room Garden City mansion
surrounded by a couple of acres and a wall to guarantee privacy, and about this
time he embraced yet another scheme for milking his brokerage business. His
new idea involved a cast of "subcontractors" in Kansas City and Hawaii, and to
understand the heist we first had to get to know them.

In Kansas Cit)', back in 1980, little Indian Springs State Bank had been
struggling to break out of its small shopping-center location, squeezed between
Wig City and Athlete's Foot shoe store. The board of directors of Indian Springs
was unhappy with the bank's lackluster performance, so they hired William
Everett Lemaster, 56, away from a rural bank in Lexington, Missouri, because
he had "impeccable credentials," a former chairman of Indian Springs bank told
an American Banker reporter. One of Lemaster's first moves was to hire former
local attorney Anthony Russo (whose credentials were anything but impeccable),
who reportedly told Lemaster he could drum up all kinds of new business for
the bank.

The two men were very different: Lemaster was tall, thin, and distinguished
and reminded associates of an ambassador; Russo was ten years younger, short,
fat, and talkative, and he wore an ostentatious display of jewelry. Russo was
plugged into centers of power in Kansas Cit)' from his years as a prominent
criminal attorney there, and Lemaster may have wanted to use those contacts
to invigorate Indian Springs bank. The kind of contacts Rus.so had, however,
were not necessarily the best medicine for a small financial institution. According
to an official of the Kansas City Crime Commission, Russo had defended or-
ganized crime figures in Kansas Cit>', in particular the Nick Civella crime family.
Russo himself had served 16 months in Fort Leavenworth federal penitentiar>'
in 1976-77 for bribery and interstate promotion of prostitution and had vol-
untarily relinquished his license to practice law rather than chance disbarment.
Nevertheless, Lemaster hired him in 1981 to be vice president of Indian Springs
bank.

Bank records showed that Lemaster's plan to make Russo a bank officer was
met with dismay by bank regulators in Kansas City, who knew about Russo's
reputation and his 16 months in prison. The Kansas City regulators passed the
application along to Washington with a strong recommendation to deny ap-
proval. The warning was ignored by Washington and on August 19, 1981, the
FDIC's board of review authorized Russo to be an Indian Springs officer but
restricted his activities to "new business development." Russo's job at Indian
Springs was to locate new depositors from among his wide-ranging business and

Tap-dancing to Riches ■ 89

personal contacts, and he had plent>' to offer in that capacity. A former Indian
Springs board member later told a reporter that Russo was well suited to his new
job:

"He could walk up to someone and say that they were to move their account
to Indian Springs State Bank, and people would do it with no questions asked."

At about the same time that he hired Russo, Lemaster also appointed Iranian-
American businessman Farhad Azima, 39, to be a bank director. The three
men had reportedly met when Lemaster was an "advisory director" and Russo
was a "financial consultant" for a mysterious airline. Global International Air-
ways, owned by Azima and headquartered in Kansas City. In 1978 Azima had
founded Global International Airways to ship cattle to Iran, he told a Kansas
City Star reporter, but when the Shah of Iran was ousted in 1979, Azima had f.
to adjust his business plan. With money borrowed from an Arabian international _
bank. Global International quickly became one of the nation's largest charter
airlines, with 900 employees worldwide and 20 planes, including seventeen 707s,
two 727s, and one 747, the Star reported. But to this day it is not exactly clear
what Global International really did, and Azima refused our requests for an
interview.

Global International Airways first came to the public's attention in 1979
when it had an airplane stranded for three days on an airfield in Tunis, Algeria.
The pilot had been paid $93,000 in advance to make the flight, but when his
payment arrived in $100 bills in a suitcase, he became suspicious. And when
cargo was loaded on his plane at the Tunisian airport, he demanded to see the
relief supplies he was supposed to be flying from Lebanon to Nicaraguan refugees
in Costa Rica.

Let me see the "lettuce," he insisted.

The "lettuce" turned out to be twin-barreled 57-millimeter guns with several
dozen cases of ammunition labeled in Chinese. Later the Tunisian government
said the Palestine Liberation Organization had been trying to send arms to the
Sandinistas. A Global crewman later told the Star of a standing joke among the
crew:

"They [airport personnel] would ask us what our cargo was and we'd tell
them cabbages and cabbage launchers."

Apparently to discourage nosy airport personnel, former pilots said subse-
quent shipments stopped masquerading as cabbages. The munitions boxes "had
Red Cross stickers all over the sides," one of Global's former pilots said.

Global International developed a reputation among insiders as one of the
CIA's secret charter airlines. Former Air America pilots^ showed up on its pilot
roster. It flew arms shipments to Ecuador, Peru, Nairobi, Thailand, Haiti, and
Pakistan. Azima later said the flights had been cleared by the U.S. State De-
partment. Asked about the CIA, Azima told the Star, "No comment. "*"

When Lemaster appointed Russo and Azima to posihons at Indian Springs

.s

90 ■ INSIDE JOB

bank in 1981, Global International Airways was at the height of its activities out
of the Kansas City airport. Whether Azima got Indian Springs State Bank directly
involved in covert activity, we could never determine. However, the following
year Russo received a $25,000 check from Global Airlines, and later when he
was questioned about the check in court (Russo was on trial for tax fraud. He
was acquitted), he gave the following explanation:

[Global International] was hired by the United States government to fly the
president of Liberia, which was a new government, and its cabinet around
the world on a goodwill tour. Liberia is a little country' in Africa that 1
studied about, as a result, and learned a little bit about. After the War against
[sic] the States, Lincoln, our president, sent some slaves to Liberia to live.
And they lived on the, I believe, the west coast of Africa. Yes, the west coast
of Africa. And formed this little country called Liberia.

The United States has supported that countr>' over the years. And about in
1981 they had a coup. Sergeant (Samuel] Doe, who was a sergeant in the
Liberian Army, overthrew the government. The government was backed by
the, our CIA and our government. And when the revolution or coup oc-
curred, the United States then wanted to become friendly with the new
government, wanted to continue to have ties between the United States and
Liberia [not Libya, Liberia] and wanted us to continue our relationship with
them. So they hired Karhad's airline. Global, to take Sergeant Doe, his
entire cabinet, around the world on a goodwill tour.

Farhad asked me if I would go as the "host" to the president and the cabinet,
to escort them from countr)' to country. It was at that time that, of course,
I was an officer of the bank and I had to check with Mr. Lemaster, who
was the president, and he covered for me and I took that trip around the
world and we went all around the world with the president and his cabinet,
and the president and I became friends and I would introduce them and
kind of act like an ambassador. . . . The arrangement with Mr. Lemaster
at the time was that any fee I would recover I would split with him because
he covered for me at the bank.

Azima also testified during Russo's tax fraud trial, and the scheduling of his
appearance had to be moved up one day because, he told the court, he had a
luncheon meeting in Washington, D.C., the next day. A fru.strated member of
the prosecution team later told us that she believed Russo was acquitted of the
tax fraud charges partly because of the aura of respectability the references to
the CIA gave him.

Indian Springs State Bank treated Azima well. Examining bank records, we
discovered his personal account at the bank was frequently overdrawn even as
bank examiners demanded — on at least three occasions — that his loans be paid
down. Each time examiners returned thev found the loans still on the books

Tap-dancing to Riches '91

and still in arrears. In 1983 Azima owed Indian Springs State Bank $800,000.
At least $600,000 of the money went to Global International and a related
company, even though Indian Springs State Bank's loans-to-one-borrower limit
then was $348,881. Collateral for one of Azima's loans was his DeLorean.^

Azima also had other connections at Indian Springs State Bank. President
Lemaster claimed in bank examination reports that Azima had sponsored the
Dunes Hotel and Casino in Las Vegas for an unsecured loan of about $200,000
in 1982. The loan was guaranteed by Dunes owner Morris Shenker. Shenker
was a millionaire St. Louis defense attorney who in the early 1980s was chairman
and controlling stockholder of the Dunes Hotel and Casino in Las Vegas.'
Shenker had been Teamster boss Jinmiy Hoffa's attorney and confidant for over
ten years, until Hoffa disappeared in 1975. Through him Shenker had access
to the Teamster Union's $1.5 billion Central States, Southeast, and Southwest
Areas pension fund.'^ Bank records revealed that a Shenker business associate
from Las Vegas, Jay P'ihn, also had a loan at Indian Springs. Russo testified he
and P'ihn teamed up to broker fuel to Azima's Global Airways, which, according
to Russo, had a contract with some Las Vegas hotel-casinos to fly junkets (ferrying
tourists to Las Vegas). Kansas bank regulators complained about the Dunes
Casino loan, saying Shenker was not a creditworthy borrower and the casino
was too far away from Kansas City. Regardless of demands by regulators that
the loan be removed from the bank's books, it never was.'"

Federal organized crime investigators said Shenker was an associate of the
Nick Civella mob family in Kansas City." Regulators found the Civella family
at Indian Springs bank too. They were part of that "new business" they said
Tony Russo brought to the bank. Members of the Civella family got $400,000
in loans from Indian Springs, bank records show, including one for an Italian
restaurant. Their accounts were "habitually overdrawn," a bank examiner com-
plained in one examination report. At the end of 1982 regulators alleged that
bank officers kept a loan to a Civella current by rolling it over (renewing it) and
increasing the amount of the loan at each renewal to cover the interest costs the
loan had accrued since the last renewal.

At the same time that Indian Springs was making sweetheart loans to the
Civella family, some of the Civellas were embroiled in a messy criminal pros-
ecution in Kansas City. Federal organized crime prosecutors in 1981 had indicted
brothers Nick and Carl Civella and others for skimming $280,000 off the gaming
tables of the Tropicana Casino in Las Vegas. Nick Civella died of cancer before
the trial ended in July 1983, but his brother Carl was convicted. Carl Caruso,
convicted along with the Civellas, was also on the loan list at Indian Springs.
Caruso operated junkets for the Las Vegas Dunes out of several Midwestern
towns, including Kansas City. In court it was revealed that he was the bagman
for the skimming operation, transporting the skim from the casino to Chicago
and Kansas City for distribution to the mob families there.

92 • INSIDE |OB

In this setting Mario Rcnda was about to embark upon a new scam. He had
recently met Franklin Winkler, the son of an old friend, and they had agreed
to go into business together.

Franklin Winkler was an international wheeler-dealer. He and his dad. V.
Leslie Winkler, were cosmopolitan con men. They were Hungarian Gypsies,
smooth ojjerators, and both spoke a number of languages. Franklin, who was
in his forties, had been born in Istanbul and had li\ed all o\er the world, wherever
his father Leslie's schemes took them. Franklin had most recently li\ed in Cuba,
Italy, Australia, Kansas City, and Southern California and had lately settled
temjx)rarily in Hawaii. Leslie lived in Palm Springs. Franklin and his father
were fat and affable. Franklin weighed over 300 pounds, but he was a charmer
whom women found enchanting. Described by federal prosecutors as "a criminal
financial genius," Franklin had reportedly already been convicted of felony frauds
in both Italy and France but had never spent a day in jail. An attorney who had
cross-examined him said he had a remarkable facility for slipping into a variety
of nearly perfect foreign accents.

"He'd be talking to me about something during court recesses and all of a
sudden he'd be speaking with a perfect French accent, or Italian, or Middle-
European accent. He'd just throw it in for effect. The guy was really smooth."

Franklin Winkler had been losing money on real estate investments in
Hawaii, and regulators said he agreed to cooperate with Renda in a scheme that
would benefit them both. Renda would broker deposits into savings and loans
or banks if the institutions agreed to make loans to Hawaiian real estate part-
nerships fronting for Winkler and Renda. "Linked financing, " where deposits
were promised to a bank or thrift in return for loans, was not always illegal but
regulators didn't like the practice because they feared the promise of huge deposits
would induce financial institutions to make risky loans that they would not
otherwise have made. But the linked financing Renda had in mind was illegal
because it was an end run around Indian Springs State Bank's loans-to-one-
borrower limits, which at the time were between $250,000 to $350,000.'-

The timing of this new friendship bchveen Renda and Winkler was perfect
because within weeks Anthony Russo went to Hawaii on vacation. Before he
left he contacted an old friend who told Russo to look up a Franklin Winkler
in Hawaii, which Russo did. The two men liked each other, and Winkler made
Russo a business proposal. Authorities said Winkler suggested that under "the
right circumstances" he and his friend Mario Renda could get Indian Springs
bank all the deposits and all the loan business it could handle. Russo liked the
sound of the offer.

A few months later, early in 1982, Russo traveled to Las Vegas, where he
met again with Franklin Winkler. Accompanying Winkler this time was Sam

Tap-dancing to Riches ■ 93

Daily, a retired Air Force colonel, then a Honolulu realtor. Daily was a Louisiana
redneck, a short, fat man who looked like a IV huckster. He had hlack, greasy,
plastered-down hair, a sailor's tongue, and a terrihle temper.

Indian Springs State Bank Vice President Anthony Riisso, con man and
swindler Franklin Winkler, and Hawaii realtor Sam Daily met in a suite provided
as a favor to Russo by Dunes owner Morris Shenker. Regulators charged that
under the plan the men formulated at the Dunes, Renda would broker deposits
into Indian Springs State Bank — "courtesy deposits" they were euphemistically
termed. In return the bank would make loans to straw borrowers" who would
be fronting for Renda, Winkler, and Daily.

I'he details of the plan would work like this: Renda would put the word out
through First United Fund that he could place deposit money with banks and
thrifts at rates a full percentage point or more above the going rate at the time. '"'
Renda knew full well that the prospect of such a high interest rate would attract
managers of credit unions and pension funds who were constantly on the prowl
for the best rate for the money they managed. (Renda and his brokers mockingly
referred to these credit managers as "rate junkies.")

All a bank or thrift had to do to get these deposits was agree to make a few
loans to Renda's Hawaii "investors." Once the institution agreed to make the
loans, Renda would send the deposits to the thrift or bank and, almost the same
day, Winkler and Daily would send in their straw borrowers" to get the agreed-
upon loans. "' These individual borrowers (lined up by Winkler and Daily) would
get a fee of between 2. 5 percent and 6 percent of the loans obtained in their
names. '^ When the loans were funded the borrowers would turn the money
over to Winkler and Daily, who would tell the straw borrowers they could just
forget about having to pay back the loan. Winkler and Daily would take care of
that, they said. By sending in many straw borrowers, Winkler, Daily, and Renda
disguised the fact that all the loan money was going to them. And when the
loans went into default, the straw borrowers' names would be on the foreclosure
papers and lawsuits, not their names.

The key to the whole arrangement was Renda's deposits. They were the bait
that enticed bank officials to play along with the scheme. Without them little
of the looting over the next five years would have been possible.

Russo later testified that he introduced Franklin Winkler to Indian Springs
State Bank President Bill Lemaster. Winkler told Lemaster that First United
Fund would broker into Indian Springs all the deposits he wanted in return for
nothing more than some loans. To Lemaster this must have looked like a good
way to pick up both deposits and loan business in one neat package, without
having to pay the deposit broker a commission, and he agreed to the arrangement.
In June 1982 Winkler, Daily, and Renda began shopping for straw borrowers.

94 • INSIDE JOB

By July 19. 1982, First United Fund had placed the first batch of brokered funds
at Indian Springs State Bank, and the first crew of straw borrowers were in the
starting gate. Winkler outlined the operation in one last letter to Renda that
concluded:

"1 suggest that we proceed with this first pilot transaction and then we should
get together in order to formalize a proper modus procedendi for all future
transactions of this type." In other words, if the scam worked at Indian Springs
State Bank, they would expand their operation to other financial institutions.

Indian Springs State Bank made the loans to the straw borrowers as planned.
The scheme worked perfectly. And on August 29 Franklin Winkler called a
meeting with his dad, Leslie, and Renda at Southern California's luxurious La
Costa resort to review the progress of their plan.'* After the La Costa sit-down,
Franklin's father, Leslie Winkler, sent Renda and Franklin a memo grandly
entitled "Memorandum Premenoira." In the memo Leslie stated:

. . . Both Franklin and Mario have agreed to carry out a number of trial
transactions under the contemplated terms and procedures. One transaction
has already been concluded via k'.C. Bank'" and the intention is to rejjeat
a few similar deposits which will demonstrate the feasibility of the operation
of the program. (Leslie's interest in the project was not platonic. Because
he had introduced Franklin and Renda, he was entitled to a "finder's" fee
on each deal that went down.)

In the month following the meeting at La Costa, the three men formed at
least eight companies and partnerships to conceal the paper trail left behind by
their activities. Renda, Franklin Winkler, and Daily began visiting banks and
savings and loans in areas they had targeted for high-growth potential — Kansas
City, Southern California, Honolulu, Texas, Denver, Phoenix, Seattle, New
York, and New Jersey — and pitched their linked financing schemes. The code
name used for these transactions at First United was, appropriately, special deals.

Then Renda added a new wrinkle. He ran ads to let people know that for
a fee he could supply deposits for anyone who needed a loan and wanted to get
his own linked-financing deal going. Renda placed ads in major newspapers,
including The Wall Street }oumal, the Los Angeles Times, and the New York
Times, which read:

MONEY FOR RENT
Borrowing obstacles neutralized
by having us deposit funds with
your local bank: New tumstyle
approach to financing. Write to:
FUND, Suite 31 1,1001 Frank-
lin Ave., Garden City, NY 11530

Tap-dancing to Riches ■ 95

After these ads came out Renda was besieged by brokers or borrowers around
the country who agreed to compensate Renda (in a variety of ways) if he would
steer deposits to a thrift or bank that had already agreed to make them a loan
upon receipt of the deposits. So, in addition to the "special deals" Renda had
going with Franklin Winkler and others, he began supplying funds for other
people's special deals as well. Later he would testify in court that he placed
deposits for "hundreds" of special deals arranged by others.

These were perfect scams. Renda used other people's (federally insured)
money to influence bank and thrift officials to make loans to the phony
borrowers — the officials could even use the actual cash from Renda's deposits
to make the loans. Ail Renda had to do was break the money into $100,000
chunks so it would be insured by the FSLIC. Even if Renda's scam eventually
caused the bank to collapse (becau.se the loans were not repaid), Renda had no
worries — his deposits were insured and his straw borrowers already had the loans.
Renda saw the possibility of arranging linked-financing scams at thrifts all across
the nation. He could borrow hundreds of millions of dollars before anyone
caught on, and then he could move the scheme on to the next institution. He
knew over 3,000 thrifts and thousands more small banks that might take the
bait. Even in Ed Gray's darkest nightmares over the potential evils of brokered
deposits, he had never imagined abuses worse than the ones Mario Renda had
in mind.

CHAPTER NINE

Buying Deposits

When regulators removed most restrictions on brokered deposits, beginning in
1980, officers at many financial institutions got in line to use the services of the
new deposit brokers who set up shop around the countn'. Among the institutions
whose officers saw the advantage of using brokered deposits was Penn Square
Bank, a small shopping-center bank in Oklahoma City, and soon the officers
on the bank's money desk knocked on Mario Renda's new door at First United
Fund. The bank's officers used the brokered deposits from First United Fund
(and from other deposit brokers) to finance risky lending in the oil business,
which was booming. ' In July 1982, Penn Square Bank collapsed, the sixth largest
commercial bank failure in U.S. banking history.^

Thus it was that on September 30, 1982. at the very moment Winkler's and
Renda's operation at Indian Springs State Bank was coming to life, Renda got
some very unwelcome attention. Representative Fernand St Germain (D-R.I.),
chairman of the House Banking Committee, conducted hearings into the Penn
Square Bank failure and wanted to know, among other things, what role deposit
brokers had played in the Penn Square disaster.' He summoned Renda and
others to testify before the committee. The hearings put the spotlight on deposit
brokers like First United Fund and threatened to result in a curtailment of their
activities. By this time, however, the Reagan administration had put its fijll
political muscle behind deregulation, and Treasury Secretary Donald Regan
(a.k.a. "the father of brokered deposits") had the president's car. Washington
was marching in unison on a deregulation course that c\en the Penn Square
catastrophe couldn't head off, and deposit brokers survived their congressional
grilling unscathed.

Emboldened by this close encounter, Renda saw no need at all to stop his
operation at Indian Springs bank. It went off like clockwork:

96

Buying Deposits ■ 97

First United Fund proceeded to place $6 million in deposits at Indian
Springs State Bank;

Daily's straw borrowers received $^.7 million in loans;

The straw borrowers were paid their fee and they turned the loan proceeds
over to Daily, Winkler, and Renda.

Renda became bullish on the future. He moved First United Fund from its
cramped offices on Old Country Road in Garden City, out in suburban Long
Island, to elaborate suites on Franklin Avenue. He maintained a bull pen of
brokers who spent their days on the phones placing deposits at institutions around
the country. In late 1982 he employed 15 brokers (later to swell to 40) in First
United's bull pen, and many of them were pulling down six-figure commissions.

But Renda's methods and those of a handful of other deposit brokers attracted
still more unwelcome publicity. After a few large credit unions complained that
their accounts had been "bilked" by such brokers, NBC-TV produced a news
documentary on the problem and they interviewed Renda for the piece. Renda
relished the exposure. After standing up to congressional scrutiny, he had become
cocky. Following the airing of the NBC program he would end his morning
peptalk to his staff by standing up and saying, "Okay, boys, get out there and
bilk em."

A frequent visitor to Renda's new offices was Salvatore Piga, whom organized
crime investigators identified to us as a Lucchese (Mafia) family associate. An
assistant U.S. attorney described him as a "ruthless leg breaker," and his rap
sheet showed a string of arrests for grand larceny, assault, robbery, burglary,
extortion, and criminal possession of stolen property. Mario, on the other hand,
called Piga a "teddy bear." Piga was in his early fifties, stocky, and in top physical
shape, and he carried what the bull-pen brokers called a "cannon" under his
coat. Sal, with his gun bulging, added more than just a touch of color around
First United Fund.

As 1983 began the future was looking good at First United Fund. Mario
and his brokers had placed $2. 5 billion in 1982 and expected business to increase
dramatically in 1983. Renda bragged widely that he could put $50 million into
any institution on a day's notice. One day Winkler visited a banker and put
forward the familiar linked-financing scheme. The banker was skeptical that
Renda could actually produce the deposits. Winkler picked up the phone and
called New York.

"Mario," he said, "deposit $1 million in this bank tomorrow morning." To
the banker's amazement, it was done. What more needed to be said?

Franklin, Leslie, and Mario frequently visited each other in Hawaii and
New York. Renda was becoming an important man in Hawaii, thanks to the

98 • INSIDE JOB

straw borrowers' money, much of which was going into Hawaiian real estate.
When we looked at Renda's Hawaiian activities, we found ConsoHdated Savings
owner Robert Ferrante/ Rcnda and Ferrante were in\olved together in a com-
pany called Seaside Ventures, which was converting an old hotel into offices.
Attorneys for the FSLIC said Consolidated Savings made Seaside Ventures a
$2.2 million loan. Renda later testified that he wired the money straight to his
personal Swiss bank account. Walter Mitchell, the Rcdondo Beach city coun-
cilman who went to prison after being accused of taking a bribe from Ferrante,
got a job with Seaside Ventures in Hawaii after he got out of prison. (Part of
his conviction was later o\erturned.)

When we found out that Renda and Ferrante were doing more than deposit
business together, we looked deeper into their relationship. We discovered they
had been associates for several years, and we obtained documents that showed
they were also invoked together in at least hvo other major projects, the Kailua
Shopping Center in Hawaii and the Palace Hotel in Puerto Rico. (The casino
deal was never completed and the project ended in bankruptcy.) An FSLIC
attorney later told us that Renda and Ferrante \acationed together in the Ca-
ribbean in 1986, renting First United Fund's 100-foot yacht Surrenda for the
occasion. Ferrante, invoices show, paid the boating tab with a $15,000 Con-
solidated check. Poking around these leads, we found out that the FBI in Los
Angeles had a keen interest in the Ferrante-Renda relationship. Maybe that was
why the folks at Consolidated were unusually concerned that Renda's association
with Ferrante not become general knowledge. On at least one occasion, S&L
records showed, Ottavio Angotti chastised a secretary who had written "copies
to Mario Renda" on the bottom of a memo. Angotti X'ed out Renda's name
and told her she was not to do that again.

Renda was building an empire in Hawaii, but his well-oiled machine sud-
denly developed a squeak in Kansas City. In February 1983, FDIC examiners,
who had given the Indian Springs State Bank boob a thorough going-over, said
they weren't fooled by Winkler's and Daily's straw borrowers and declared that
the numerous Hawaii loans, which totaled $3.7 million, were in reality one big
loan. Examiners still weren't clear about what was going on there, but they were
sure all these loans were part of one big venture of some sort. Since loans-to-
one-borrower limits at Indian Springs State Bank were then about $350,000,
examiners had identified what one former Indian Springs official termed "a
monumental loan-limit violation." Regulators told Lemaster that these Hawaii
borrowers had to repay the loans.

Lemaster gave Daily the bad news: Regulators had ordered that the Hawaii
loans be repaid and no further loans made. The original plan to roll the loans
over (renew them) through Indian Springs bank when they came due was now

Buying Deposits • 99

out of the question. But Winkler and Daily told Lemaster there was no way
they could repay the loans. The money was long gone. If was then that Lemaster
began to see he was caught in a trap. Renda had anesthetized his sound banking
instincts with First United Fund's brokered deposits, which Lemaster had hoped
to use to build Indian Springs State Bank into one of the leading banks in the
state. But now his reputation for integrity, cultivated through years of hard work
and dedication, was in real jeopardy. Acquaintances said it was at this point that
Lemaster "began to go over to the dark side." Apparently he saw he had litUe
to lose. The metamorphosis was startling to those who had known him for years.
He lost his dignified ambassadorial air and replaced it with glitz, adopting Russo's
more flashy image.

But Lemaster's problems in no way dampened Anthony Russo's enthusiasm
for Renda's linked-financing scheme. Regulators learned that Russo had been
holding seminars around town to teach other bank and thrift officials how they,
too, could attract Renda's brokered deposits and then loan the money out to
Winkler's and Daily's "qualified" investors as built-in customers. Renda paid
Russo a finder's fee for bringing new institutions into the fold. Russo later
admitted that, thanks to his efforts, just as Winkler and Renda were wondering
how they were going to replace Indian Springs State Bank as a source of money
a new convert showed up to fill the gap — Coronado Savings and Loan, a neighbor
in the shopping center with Indian Springs State Bank. Renda promptly brokered
$4.7 million into Coronado Savings, and Coronado in turn loaned Winkler, et
al, $3. 3 million. Renda discovered that savings and loans were even easier targets
than banks because, on the whole, their management was less sophisticated.

"Renda used to tell his troops at First United Fund that as stupid and sheeplike
as bankers were, savings and loan officials were on an even lower grade of
intelligence," an investigator recalled later. "Consequently, Renda began fo-
cusing a great deal of energy on linked financing with savings and loans."

By May 1983 Lemaster was under severe pressure from regulators to resolve
the Hawaii loan violation. In desperation, Lemaster bypassed Winkler and Daily
and wrote directly to their straw borrowers, informing them that their loans were
coming due and had to be repaid in full. Lemaster's letter came like a bolt of
lightning out of a clear blue sky for the straw borrowers, who then converged
on their keeper, Sam Daily. They'd been told by Daily not to worry about their
loans, so why was Lemaster threatening them, they wanted to know. Daily
turned to Winkler for help, demanding that he tell Renda to pump more money
into the operation.

Despite all this regulatory attention being given to Indian Springs State Bank,
bank examiners discovered, Anthony Russo regularly attended bank loan com-
mittee meetings in which bank directors discussed the bank's most important
business — in clear disregard of earlier demands made by regulators that his
activities at the bank be confined to drumming up new business. He exerted

100 • INSIDE JOB

significant influence over daily operations at the bank. To make things even
worse, examiners discovered that some of the Civella-related loans were in
default. Those were no ordinar)' customers and the bank was having a hard time
finding a law firm brave (or foolhardy) enough to tn- to collect on their loans.

"Law firms wanted no part of those particular cases," one former Indian
Springs State Bank official told a reporter.^

This wasn't the kind of "new business" the board of directors had had in
mind when they let Lemaster talk them into hiring Russo, and they told Lemaster
to fire him. At first Lemaster resisted, but minutes of the June 1983 meeting
showed that the board complained bitterly about Russo's alleged mob customers
and about the Hawaii loans, uhich, after all, Russo had brought to the bank.
At last Lemaster relented, agreeing to have Russo out by the end of the month.

With all this turmoil in Kansas City, no one was paying any attention to
Sam Daily in Hawaii. Lemaster, Winkler, and Renda had their own problems
as the scheme began to unwind, and they left Daily to twist in the wind. In
desperation. Daily began penning a series of angry letters to Winkler, letters
filled with accusations that Winkler and Renda had misled him, cut him out
of his share, and left him to face the bank and the straw borrowers alone. Daily
demanded that Renda use some of the loan proceeds he'd stockpiled to pay off
the straw borrowers* loans at Indian Springs State Bank. The response Daily got
from his first few letters was silence. He was furious.

On the evening of June 16, 1983, Franklin Winkler was relaxing in his
Honolulu home when the phone rang. He got up from his easy chair and took
the call. It was Sam Daily. Almost immediately a \ollcy of shots rang through
the house as an assassin, with a clear view of Winkler through the living-room
window, opened fire. P'ranklin was hit three times, once in the arm, leg, and
hand. No one was c\er charged with the attempted murder. But nine days later
Renda wrote in his desk diar>' that Winkler had called to say he suspected Daily:

Sam (Daily) wrote ultimatum letter signed "or else." . . . Franklin didn't
want to discuss particulars on phone . . . will meet in NYC Thursday.

Winkler rehirned to work in his Honolulu office a week later with a cast on
his wrist but otherwise fit. His employees had hoped for a longer convalescence.
His office manager, Chuck Downing, wrote in his desk diary on June 25:

F.A.W. back in office for first time since shooting, wearing a cast on his
wrist. My staff worried about going into his office and getting in the way of
the next bullet.

By this time Daily was completely out of money. His wild letters had con-
vinced Winkler and Renda that he was a real threat to them. He was talking

Buying Deposits • 101

too much. Daily wrote Winkler again, accusing him and Renda of all manner
of underhanded double dealing, outlining his gripes in painful detail. On July
18 Winkler, trying to quiet the volatile Daily, shot off an equally detailed letter
addressing Daily's complaints one by one.

Winkler reminded Daily that in 1982 both of them had been in dire financial
straits, facing foreclosure on all sides, and that it was he, Winkler, who had
come up with a scheme and let Daily in on it.

"Anyway the main point I am trying to make," Winkler wrote, "is that
in some form or another we were able to obtain approximately $1,400,0U0 in
cash to both of us in 1982 which amount allowed both you and I to stay in
business."

At about the same time, thousands of miles away in Kansas City, William
Lemaster's son, a Missouri doctor, began to receive strange phone calls. When
he picked up the phone there was only long silence on the other end until the
caller finally hung up. His father's white Lincoln Continental was vandalized
several times over a two-week period.

"Someone was trying to rattle his cage," Lemaster's son said.

In the early morning hours of July 22, 1983, William Lemaster left a family
party to drive home. Shortly thereafter a witness saw Lemaster's Lincoln cross
a narrow bridge in Lexington, then suddenly make a wide U-turn at the end of
the bridge and speed back across the bridge, heading in the direction from which
it had come. When the car reached the end of the bridge it shot forward, as
though someone had pushed the accelerator to the floor, leapt a curb, and
slammed full speed into the concrete foundation of a roadside war memorial.
The car burst into flames, burning the 59-year-ofd banker's body beyond rec-
ognition. What was left of the body, a handful of ashes and bone fragments,
was swept up and officially cremated the next morning.

The incident could not have been an accident, according to investigators,
but for several reasons it also didn't seem like suicide. When Lemaster had left
the family gathering at 2 a.m., he had not given his family any hint that he
intended to kill himself five minutes later. He had said no long good-byes, left
no notes, made no final arrangements. The man who witnessed the accident
said he could not identify Lemaster, or anyone else, as the driver of the Lincoln,
so people began to wonder if Lemaster had really been in the car. Or if he had,
had he been dead before the accident? they wondered. Maybe he had been
drugged. Investigators determined that the fire had begun in the back scat, a
place that contained no flammable liquid, a place where car fires seldom start.
Further, the fire was a furious one that instantly consumed the entire passenger
compartment. The fierce flames left no body to autopsy and made identification
of the corpse impossible.

102 • INSIDE JOB

Could it have been murder? some asked. "It's a possibility," the young
Lemaster said. "I would guess there were a few who had motives. "''

While Lemaster's problems were over, his associates were left to deal with
the fallout from his linked-financing arrangement with Renda. By midsummer
1983 most of the $6 million in Hawaii loans made by Indian Sprmgs State Bank
were in deep default and the bank was crawling with FDIC regulators. Over at
Coronado Savings, FSLIC auditors had just found the new loans to the Hawaii
partnerships, $3.7 million in all, that were also already in default.

In Hawaii, Daily was becoming increasingly frantic . . . and noisy. On
August 8 Winkler called Renda, who jotted in his desk diary, "Franklin informed
me that Sam Daily stole all the office furniture and equipment [from the part-
nership offices in Hawaii]. "The following week some of the employees in Hawaii
were told not to come to work because there was no money to pay them.

On September 6 Franklin Winkler penned a four-page letter to Daily (who
was, after all, right there on the Hawaiian island of Oahu with him, merely a
local phone call away. But maybe, after the shooting, Winkler didn't take phone
calls any longer). Franklin's letter simply said:

/ learned that you are using me as a scapegoat to blame all of the wrongdoings
on me so that you can exonorate [sic] yourself of any wrongdoings, & create
an image of credibility for yourself. . . . Mario is aware of all these items
and his only comment was that in the event you visit regularly a psychoan-
alyst, neither him nor I would have sufficient money to pay for such psy-
choanalyst to fully complete his cure on you.

On September 14 the FSLIC slapped a cease-and-desist order on Coronado
Savings, stopping the thrift from making any future loans to the Hawaii part-
nerships or renewing the old ones. But regardless of these troubles, Renda and
Winkler were reluctant to bid farewell to their beloved scheme, and a month
after Coronado was lost to them, Renda's Hawaii office hosted lavish parties for
bankers and savings and loan executives attending separate conventions there.
It was an opportunity to find some new pigeons, and Renda spent $12,000 on
the parties and sent several New York executives with their wives to assist in the
grand event. He rented limousines to bring guests to the parties from their hotels.
His employees were instructed to explain, if anyone asked, that the office
furniture — which had been repossessed days earlier — had been moved out to
make room for the party.

But keeping up appearances did nothing but infuriate Sam Daily, who was
still trying to get Renda to pay off the Indian Springs loans so the straw borrowers
would leave him alone. He did not appreciate having been left to juggle a
crumbling empire of overencumbered properties with crushing negative cash
flows and a small army of straw borrowers who were just now realizing that they

Buying Deposits '103

had been had. On November 20, 198?, Daily penned another of his famous
letters. This time he tried to get Franklin Winkler on his side by blaming Renda
for all the troubles.

Franklin.

. . . I am sick and tired of protecting someone who has destroyed me. My
firm intentions are that if Mario Renda refuses to do his part in helping us
resolve these problems then I am going to hold a news conference with the
Kansas City Business journal and Kansas City Star, and i am going to tell
them the whole sordid affair as it concerns First United Fund and Mario
Renda. I want you to make Mario Renda well aware that 1 believe he deals
with the Mafia and with known hit men. I had his one-eared friend checked
out when he arrived in Honolulu, and he was rated as one of the top hit men
in the United States. (An investigator told us he heard that Renda had sent
Salvatore Piga — who was rumored to have lost a chunk of an ear when it
was bitten off in a fight — to Hawaii to discover who shot Winkler. History
has not recorded whether or not he was successful.)

In the event Mario Renda thinks that he would like to place a hit on me, I
think you should tell him that that would probably not be too wise. I have
sent another letter, in my best literate terms, outlining the whole series of
events that have occurred as I know them concerning his business dealings
and his association with the New York hit man. Should anything happen to
me or my family I have three prominent attorneys who have a copy of that
letter. Those three prominent attorneys are very good friends of mine. I can
assure you that they will see Mario Renda behind bars if anything happens
to me. I think he knows that I have the moral responsibility, the moral
fortitude, and the pure guts that are necessary to see his company destroyed
by revealing to the public the manner in which he carries on his business
affairs and his involvement with Indian Springs State Bank.

First United Fund's high-water year was 1983, even though the Kansas City
scams were falling apart. Renda 's salary in 1982 had been $150,000. In 1983
he voted himself a bonus of $300,000 and in 1984 he would vote himself a
bonus of $400,000." First United Fund now had offices in Garden City, New
York, in Woodland Hills, California, and in the Grosvenor Center in Honolulu.

But by late 1983 Renda's empire was seriously threatened, not by federal
regulators, or by the FBI, or Sam Daily, but by Richard Ringer and Bart Fraust,
two reporters working for the century-old newspaper the American Banker. Ringer
first dented Renda's armor when he set out to cover the indictment of an East
Indian who used Renda's linked deposits to swindle a number of small Midwest
banks out of tens of millions of dollars. The American Banker story swept through
the financial markets and First United Fund started losing customers right and

104 • INSIDE JOB

left. Renda became obsessed with the stor\' and he filled his desk dian^ for weeb
with increasingly frantic scribblings:

Article in American Banker appeared very negative. Many clients called also
negative after article. Prudential Bach will no longer do business or finance
with First United. Very Damaging.

A.G. Becker cancelled us out. No more business because of American Banker
Article. Contacted FBI for help.

Rumors on the street REALLY BAD. Street filled with rumors. No chance
anyone will do business with us now.

Steve called to say Saudi's might not do business with us now.

On August 16, 1983, Renda filed a $90 million lawsuit against the American
Banker for libel.' (Some time later Richard Ringer was jogging after work when
a green Mercedes-Benz pulled alongside. Two well-dressed white men stepped
from the car, walked up to him, and proceeded to administer a thorough beating.
With their work done, they slipped back into the Mercedes and drove away.
Neither man said anything to Ringer, but he certainly felt the beating could
have been a message from Renda.)

In January 1984 the Kansas state bank commissioner determined Indian
Springs State Bank was hopelessly insolvent and closed the bank down. (In
December, Anthony Russo had suddenly quit, though he remained a director
of the bank's holding company. No doubt he saw what was coming and figured
the regulators who took over the bank wouldn't be developing his kind of "new
business.") A team of examiners and attorneys moved in and began the tedious
process of verifying bookkeeping entries line by line and examining each loan
word by word to determine the true financial condition of the institution. The
president of the bank, William Lemaster, who presumably would have had
information crucial to the FDIC's understanding of what had happened at Indian
Springs State Bank, was (reminiscent of Centennial's Erv Hansen) dead.'' Un-
raveling Indian Springs State Bank was going to be a mess.

1

1

CHAPTER TEN

Renda Meets the Lawyer

from Kansas

In Washington, Ed Gray had been working for months on his regulation that
would deny FSLIC coverage to brokered deposits. He got the support of Bill
Isaac, chairman of the FDIC,' and then he had to convince his fellow FHLBB
members of the importance of the move. He had powerful statistics to make his
point: use of brokered deposits was increasing at a frightening rate, from $3
billion industry-wide at the end of 1981 to an estimated $29 billion at the end
of 1983.2

On March 26, 1984, the FHLBB approved the regulation, to go into effect
October I . ' The period between approval of the regulation in March and its
scheduled implementation date in October would prove to be a period of bitter
regulatory war. Suddenly stories began to be leaked to the Washington press that
Gray was abusing his expense accounts, that he might be under FBI investigation,
and that he was a dullard who took hours to make even the simplest decisions.
A story circulated that Gray had arranged a conference call with the district bank
presidents and kept them all waiting on the line for an hour and a half while
he agonized over artwork to be used in an in-house publication. Gray said the
story was a complete fabrication.

In March 1984 Representative Doug Barnard (D-Ga.)'' conducted new
congressional hearings into the brokered-deposit issue, and the debate was heated.
Once again Mario Renda was called to testify. When questioned specifically
about his activities, he lied, denying any involvement in linked financing or in
any other activities that would contribute to destabilization of financial insti-
tutions.

Barnard had submitted written questions to the FHLBB and the FDIC, and
their written responses' were a tough, frank indictment of brokered deposits. The
regulators complained about linked financing, and they used First United Fund
as their key example.* They also complained that they were afraid the easy

105

106 • INSIDE JOB

money would encourage risk-taking by thrifts looking for quick profits in high-
risk investments. Gray said thrift failures could cost the FSLIC $2.2 billion (out
of a $6 billion to $7 billion rcser\e) in 1984, more than double the $1 billion
loss in 1985, and he was convinced that brokered deposits were an important
part of the problem."

The U.S. League, alarmed by Gray's doom-and-gloom message about the
FSLIG fund, complained that Gray was nothing but a Johnny-One-Note. Such
talk could only serve to scare the public away from thrifts, William O'Connell,
League president, warned. If Gray didn't keep quiet, he would cause runs on
thrifts across the countr\'. In Gongress legislation was introduced for the U.S.
League that would have effeeti\ely gutted Gray's brokered-deposit regulation.
Stumping for passage of the bill was the staff director from the Senate Banking
and L'rban Affairs Committee, Danny Wall. (Wall would replace Gray as
FHLBB chairman in 1987.)

One of Gray's most vocal critics during this lengthy battle was his old friend
Galifornia S&L Gommissioner Larr\' Taggart, who in March 1984 took the fight
into Gray's territorv' when he traveled to Washington to tell a banking law-
conference that brokered funds represented 80 percent of the new money pouring
into S&Ls. Cutting off that supply, he warned, could do great damage to the
institutions. Any abuses related to brokered deposits were not the fault of the
brokers, he claimed, but were the fault of S&L managers who used the money
improperly.

The deposit brokers weren't going to let Gray put them out of business
without a fight. First Atlantic Investment Corporation Securities, Inc. (FAIC)
of Miami and the Securities Industry Association sued in federal district court
to have Gray's brokered deposit regulation overturned. On June 20, 1984, FAIC
won a sweeping vietorv' when federal judge Gerhard Gessell ruled that the broker
ban was illegal and that action for such a ban had to come from Congress, not
from the Bank Board. (Later FAIC would have the dubious distinction of having
brokered the second highest [second to First United Fund] number of deposits
into institutions that would later fail.) Gray then suggested Gongress give the
FHLBB and the FDIC the authority to impose such a ban, but Congress ignored
his request. Danny Wall and members of the Senate and House banking com-
mittees breathed a collective sigh of relief. Their high-flying thrift constituents
who'd opposed the ban were happy, and presumably their happiness would be
reflected in their campaign contributions. Gray's many enemies could finally
take pleasure in seeing him publicly humiliated.

Emboldened, the news leakers'* picked up momentimi. Word spread that
Gray would not survive this defeat and was on the way out. In Juh' a story broke
in the Washington Post that Gray was under investigation by the FBI for un-
derreporting expenses tied to the renovation of his office. Gray was also being
investigated, the Post said, for abusing a $1,500 Bank Board expense account

Renda Meets the Lawyer from Kansas ■ 1 07

that was .supposed to be used for entertaining Bank Board guests. Gray and his
staff had supposedly used the money for staff lunches and cab fares. Gray denied
any wrongdoing, pointing out that the lunches were tuna sandwiches he had
brought in so he and his people could work late. I'he FBI cleared Gray of these
charges, but the summer of 1984 was not a good one for Gray or for his fight
to save the thrift industry from itself

Mario Renda had had a tough summer as well. Soon after the Barnard
hearings the American Batiker sent a second salvo across Renda's bow (certainly
a courageous move for a publication recently sued by Renda for $90 million).
It was a lengthy piece headlined "Bank Board Document Lists Money Broker
'Horror Stories'; Abuses Include Questionable Loans in Exchange for Deposits,"
and it named First United Fund as one of the brokers involved. All hell broke
loose. And a second wave of customer defections engulfed First United Fund.
Once again Renda's desk diary was peppered with apocalyptic notes:

Account exec's reporting clients are uneasy about doing business with us.

A.G. Becker said no business, cash or otherwise because of the American
Banker article. We're out of commercial paper business altogether now — gave
us 90 days to clear out.

In May 1984 Franklin Winkler's Bank of Honolulu accounts were seized by
the IRS. Apparently Winkler had failed to report something. Then more trouble
when the FHLBB began an internal investigation of linked-financing deals in-
volving deposit brokers and Ed Gray subpoenaed Renda's records. The New York
Times ran a piece headlined "Money Broker's Books Subpoenaed," which dis-
closed that the FHLBB had subpoenaed First United Fund records to "determine
the role it has played in about 20 banking institutions that have failed or are
regarded as being in danger of failing."

Renda had responded in advance to the Times reporter's written questions
with the following written responses: "We are not 'involved' in bank failures.
We are the brokerage house that the greatest number of banks in the U.S.
uses. We have quoted rates for over 1,000 banks. If 2 percent, or 20 of those
banks, fail, naturally our name stands a good chance of being mentioned
in each instance. " Did First United engage in linked financing? "This is ab-
solutely untrue. Neither First United nor any of its subsidiaries have ever
borrowed any money whatsoever — nor have any of its officers borrowed
any money whatsoever — from any banking institution for which we have quoted
rates."

Bank records would later show that Renda was lying. In fact, at that very

108 • INSIDE JOB

time he had just teamed up with a Houston-based swindler to pull a linked-
financing swindle on Rexford State Bank in Rexford, Kansas. The Rexford State
Bank scam was a classic bust-out in which they took out $2 million in loans in
about three months and left the small 82-year-old bank insolvent. Why would
Renda take the risk of continuing his "special deals" after Indian Springs State
Bank was closed, when he must have known regulators were starting to scour
Indian Spring's books trying to find out what went wrong?

"Renda felt he had nothing to worry about," said one source close to the
FDIC. "He knew that, in those days before everyone wised up, the FDIC and
FSLIC would send in two separate teams of auditors when they seized a bank
like Indian Springs. One team would only look at the deposit side of the operation
and the other the loan side. The two teams of auditors never ever compared
notes. So he thought they'd never make a direct connection between First United
Fund deposits and the Hawaii loans."

Renda was still brokering an enormous amount of deposits, and personal
financial statements showed that by 1984 he was a very wealthy man. He sur-
rounded himself and First United Fund with the trappings of success, including
a $1.2 million BAC-111, an 80-seat jet that had been converted to a luxury
corporate floor plan." Renda already had purchased a $69,000 Rolls-Royce Silver
Spirit and bought a second. To keep his wife, Antoinette, happy, he invested
in a little jewelry, two rings worth $306,000 (a platinum ring with a 10.5-carat
pear-shaped diamond and two baquettes, and an 18-carat gold ring with a 17.35-
carat emerald-cut diamond and two triangular diamonds). For his desk nothing
would do but a $1,100 silver inkwell and a $1,150 silver cigar box with two
matching silver liquor canisters. For balance there was the $6,050 English silver
tea and coffee service. Underfoot a $26, 500 Kerman rug, a $7,000 Ant Bahktiari
rug, and a $6,000 Tabriz rug. He finally had the Khashoggi life-style he had
coveted.

As we unfolded the Renda story we began to wonder how many banks and
thrifts Renda had infected and how many had succumbed.'" We soon found
out that no one had any idea. In October 1988, from a confidential source close
to the Federal Resene Bank, we did get a partial list of institutions known to
have been used by Renda. There were 160 banks and thrifts on the list, scattered
from coast to coast and even in Puerto Rico, and 104 had alreadv failed. It
became clear to us that the damage Mario Renda had done and was doing to
thrifts and banks would be years in the unfolding.

In early 1984 the Indian Springs State Bank and Coronado Savings and
Loan receiverships continued to try to figure out who owed what to whom at
the two failed institutions. The FDIC and the FSLIC in Washington hired the
Kansas City law firm of Morrison, Hecker, Curtis, Kuder & Parrish to handle

BOBSC^EIdl^

Renda Meets the Lawyer from Kansas • 1 09

some of the legal work, and one of the attorneys they assigned to settle some of
the bank's problem loans was Michael Manning. Manning was a principled,
hardworking Kansas lawyer in his mid-thirties. With no premonition that this
would be anything but a routine bank ease. Manning began as usual by dividing
up the bank's problem loans with other attorneys in the firm. By pure chance
he ended up with most of the Hawaii loans in his stack. When he looked over
what he thought were about 30 simple collection cases, he was first puzzled that
a small, landlocked bank in America's heartland would have loaned so much
money on Hawaii real estate projects. A bank examiner shared Manning's puz-
zlement: "What in the world was a fly-shit bank in the basement of a shopping
center in a suburb in Kansas City, Kansas, doing making these kinds of loans?"
(The bank wasn't actually in the basement, but it was partially underground.)

One night Manning stayed late at his office and spread the loan files out on
a table to study them together. He immediately spotted startling similarities. He
noticed, for example, that many of the borrowers said they intended to use their
loan to invest in the same limited partnerships. These were the same similarities
that had driven bank examiners months earlier to determine that the many
separate loans to the Hawaii partnerships were really part of one big loan. But
the examiners had not pursued that insight beyond the point of demanding that
Lemaster clean up the loans. If they had, they might have nipped Renda's scheme
in the bud, thus saving dozens of financial institutions from Indian Springs' fate.
Now Manning had picked up where the bank examiners had left off. He didn't
know what the unifying factor was yet, but these were not unrelated loans. He
decided to fly immediately to Hawaii to ask these borrowers some questions.

He took 30 depositions, in about that many days, from the Franklin Winkler-
Sam Daily straw borrowers in Hawaii. Getting straight answers out of them was
tough at first. They believed, the borrowers said over and over, that they were
not responsible for repaying the loans. Winkler and Daily were, they said. The
straw borrowers had broken federal law by allowing their names to be used on
fraudulent loan statements, but they claimed they were as much victims as the
FDIC and FSLIC.

From those depositions emerged a fuzzy picture of only the Hawaiian end
of the operation. But Franklin Winkler and Sam Daily were clearly implicated
in some larger scheme. Some of the borrowers mentioned someone in New
York named Mario Renda. And the borrowers had bits and pieces of information
concerning similar deals in other places like Texas and Los Angeles, but how
those events tied together was still unclear. What Manning did know for certain
was that he had stumbled upon an enterprise that reached far beyond his stack
of 30 defaulted loans.

One Hawaii borrower realized immediately that Manning's questions were
leading somewhere other than to a simple resolution of some overdue loans. He
dug in his heels and took the fifth amendment 52 times during Manning's

110 > INSIDE JOB

deposition. IronicalK , the questions he refused to answer clued Manning in to
the sensitive areas. Manning also deposed Franklin Winkler. Charming and
friendly as usual, Winkler nevertheless took the fifth amendment to every ques-
tion Manning asked him — even his name — for three days.

Manning went home to Kansas City more convinced than ever that he was
onto something important. He began to keep a daily diar\' of clues, often isolated
notes that made little sense but "seemed" important. The case was beginning
to consume him. It was on his mind all the time. What had been going on at
Indian Springs State Bank? It seemed to be bigger than Franklin Winkler and
Sam Daily, somehow. Other states were involved, the borrowers had said. Were
other banks in danger? he wondered. How widespread was this enterprise? Man-
ning spent his days, nights, and weekends trying to piece together the answers
to the puzzle.

Finally, after weeks of struggling with his conscience, the straw borrower
who had taken the fifth 52 times phoned Manning and said he wanted to talk.
He then exposed Mario Renda's key role in the scheme. There was a depjosit
broker in New York, he said, who had made "courtesy deposits" at Indian Springs
State Bank. In turn, the bank loaned money to straw borrowers who gave the
money to Franklin Winkler, Daily, and Renda and companies and limited
partnerships they controlled. Manning realized now that he was dealing with a
sophisticated form of linked financing, structured through a maze of interlocking
partnerships and companies until it became almost impossible to detect. Who
knew how many other banks and thrifts might have also been victims, he thought.

Though hired by the regulators" to pursue civil actions against those who
ovxed money to Indian Springs State Bank and Coronado Savings, Manning felt
he now had absolute evidence of criminal bank fraud (admissions from the straw
borrowers) and he convinced Kansas City FBI Agent Ed Leon of his case. Leon,
and later Manning, took this e\idence to an assistant U.S. attorney in Kansas
City, Kansas, expecting that she would immediately open an investigation. In-
stead they ran head-on into the frustrating realities of white-collar crime pros-
ecution in America. She was not interested in his case, she told Manning. It
would take too long to "turn." Her office's resources were limited. The De-
partment of Justice demanded visible results, tangible statistics — indictments and
convictions, and lots of them. Bank fraud cases took years to unravel. Thanks,
but no thanks. Incredulous, Manning next carried his evidence to the Organized
Crime Strike Force in Kansas City, where he got the same cold shoulder.

Manning reported his findings to Christopher "Kip" Byrne, senior trial at-
torney for the FDIC in Washington. Byrne had supervised Manning's pursuit
of the Hawaii straw borrowers and shared his concerns about the strange nature
of those loans. He had also heard of Mario Renda because of the periodic
squabblings in Washington about the role of deposit brokers in bank failures

Renda Meets the Lawyer from Kansas ■111

since the collapse of Pen n Square Bank in Oklalionia in 1982. Still, no one in
the Justice Department would move on Manning's information.

Then, in September 1984, Manning got a break. Six of Renda's bull-pen
brokers and Renda's personal secretary decided to break with Renda and start
their own deposit brokerage firm. This resulted in a messy legal battle because,
before hiring them, Renda had secured a pledge that they would not go into
competition with him. So when they struck out on their own, Renda sued. The
seven former employees later explained that they had read the American Banker
articles about Renda, and one of them went to Washington to try to dig up some
dirt on their old boss to further their side of the case. Byrne's name had appeared
in the American Banker stories about Renda, so the former F"irst United broker
looked him up and offered to trade information. Was Byrne interested? Abso-
lutely. It looked like Manning finally was going to get the inside scoop on First
United Fund. But on the heels of the first meeting, just when Manning and
Byrne were so close to Renda they could smell him, the seven former Renda
employees settled with Renda and lost interest in their deal with Manning and
Byrne.

The letdown was intense. To be so close and then to have Renda slip away,
it was too much. Manning was beside himself. Questions plagued him: How
big was Renda's operation? How many banks were at risk? The congressional
hearings, the newspaper stories, all warned of the dangers of brokered deposits.
Yet here was Manning, with tangible evidence of possible wrongdoing by one
of the country's biggest deposit brokers, and he was being thwarted at every turn.
It was crazy. So Manning took off the gloves and played a little hard ball. He
went back to the six brokers and Renda's former secretary — "The Seven Dwarfs"
he now called them. He threatened, he promised, he cajoled, he pleaded, and
he threatened again. Finally it worked.

Their attorneys agreed to let Manning depose them, and he and Byrne rushed
to New York before the Dwarfs could back out. Over four days, from dawn to
late into the night, they took testimony. And when they were finished they had
collected sworn testimony alleging labor racketeering, pension fraud, wire fraud,
tax fraud, mail fraud, and bank fraud involving Renda, Winkler, Daily, and
others. Never in Manning's wildest imaginings had he guessed he'd walked into
a criminal enterprise of such breadth, such stunning magnitude. Not one of the
rebel brokers had all the details of the operation, but when combined, their
testimony was devastating — and the implications for the bank and thrift indus-
tries, terrifying.

On the third day of the interrogation Manning learned from a confidential
source that Sal Piga had phoned Renda to say, "The Seven Dwarfs are talking
to the FDIC." Manning told us later it was unnerving, to say the least, to have
Piga use Manning's own nickname for the brokers. The nickname was an in-

112 • INSIDE JOB

house joke at Manning's office in Kansas. How had Piga. in New York, learned
of the term? Was one of the Dwarfs a plant? Were Manning's phones or offices
bugged? What else did Piga know? Later, when two FBI agents went to the home
of one of the Dwarfs to ask some questions, they found themselves staring down
the barrel of a shotgun. The Dwarf had feared that the agents were Renda's
men.

The sworn testimony Manning and Byrne had taken from the Seven Dwarfs
was valuable and important, but by itself it could not carry the case. They needed
documents, written proof from the files of First United Fund itself. But during
the depositions the Dwarfs were adamant. No, they would not provide docu-
ments. That would be really pushing their luck. They were afraid. Manning
and Byrne expected too much. Their lives were in danger, it was too much to
ask. But just when Manning was about to give up, someone on the inside at
First United Fund suddenly, and without explanation, produced the "smoking
guns" Manning needed. '-

Manning, on his way to catch a plane home to Kansas, pulled into a dark
airport parking lot. He walked around to the back of the car and opened the
trunk to take out his suitcase. There, in the trunk, was a fat stack of First United
Fund documents. How they had gotten there Manning would never say. If he
suspected anyone in particular, he knew it would be foolhardy and dangerous
to speculate out loud. In ten days that silent stack of documents would collapse
Renda's world.

Manning knew they had to move fast. Renda was no doubt prepared to take
steps to protect himself if he learned they were getting close. Byrne took the
evidence to Organized Crime Strike Force attorneys in Washington. They lis-
tened and sent Bryne and Manning and their evidence to the Brooklyn Organized
Crime Strike Force, saying that Brooklyn Strike Force attorneys might have an
interest in the case. They did. First United had come up in connection with an
ongoing investigation the strike force was conducting into racketeering by the
Lucchese crime family. Through the use of wire taps and bugs approved to
investigate the suspected mob bribery of Teamster officials at Kennedy Airport,
investigators had picked up an alleged mobster" talking about how Schwimmer,
First United Fund's financial consultant, was helping him launder money
through bearer bonds. '■*

The name First United Fund, therefore, got their immediate interest. "They
were willing to sjjend the cerebral energy to understand the case," Manning told
us later, and he spent the next ten days with them going over the details. Tough,
straight-talking Assistant U.S. Attorney Bruce Maffeo (ironically pronounced
like Mafia, with an "o": Mafio) picked up immediately on the importance of
the case.

Now they needed to obtain a search warrant for a raid on First United Fund

Renda Meets the Lawyer from Kansas • 113

offices. Any documents still there had to be secured before Renda had a chance
to remove or destroy them. But someone liad to sign an affida\it setting forth
the legal grounds on which they wanted to execute the search warrant. Manning
was the obvious choice, since he was the one with the evidence against Renda,
but Manning was working for the FDIC and had to have their approval for such
a drastic action. The affidavit would contain slanderous allegations about the
man who ran one of the largest brokerage firms in the United States. No, the
execution of a search warrant by Manning, a representative of the FDIC, was
out of the question, regulators said. At that point Kip Byrne, apparently outraged
bv the regulators' refusal, intervened. "Permit Manning to sign that search
warrant or you can take my job and shove it," he said, in so many words. This
was absolutely insane, he fumed. Was Mario Renda untouchable?

Voices don't often get raised at the FDIC and such an outburst by their own
senior trial attorney shocked the stodgy regulators into reluctant action. They
acceded to his demand ... he just better be right. Ten days after Manning had
found the First United Fund documents in the trunk of his car, Maffeo's troops,
30 FBI and IRS agents, assaulted the First United Fund offices at 1001 Franklin
Avenue in Garden City, New York, with the search warrant in hand. Manning
and Maffeo had been tipped that Renda was attending an all-day conference
and would be out of the office — it seemed like a good day to go calling. For
the next two days they filled box after box with First United Fund's books,
records, files, and even personal notes. Six days later agents raided Franklin
Winkler's company in Honolulu, hauling another 100 boxes of files off to Maffeo
in New York.

For both Manning's civil case and Maffeo's criminal racketeering investi-
gation, the haul was a windfall. Among the booty investigators found some
revealing items — some deadly serious, some humorous. There were verses to a
tongue-in-check song written for Renda by a First United employee. "The Twelve
Days of Bilki ng, " which was sung to the tune of "The Twelve Days of Christmas, "
outlined, stanza by stanza, how brokered deposits were used to con banks and
thrifts. The last stanza referred to such things as "banks a-failing," "accountants
auditing," "checks a-bouncing," "cops arresting," and "Steve Black hanging
from a tree."""

Another song penned by Renda employees was entitled "Bilkers in the
Night," sung to the tune of "Strangers in the Night."

The songs were amusing. A lot less amusing was evidence that Renda had
used First United Fund as a giant Trojan horse that had been granted entry into
dozens of banks and thrifts across the United States. A lot of the names of
institutions where the Seven Dwarfs had said Renda had special deals going were
found in the records seized at First United Fund:

114 ■ INSIDE JOB

Mission Bank, Mission. Kansas

Coronado Federal Savings and Loan, Kansas City. Kansas

The Metropolitan Bank. Kansas City, Missouri

Metro North Bank, Kansas City, Missouri

First Federal Savings and Loan. Beloit. Kansas

Farmers and Merchants Bank, Huntsville, Missouri

Rexford State Bank, Rexford, Kansas

Metropolitan Bank and Trust, Tampa, Florida

American City Bank, Los Angeles, California

Newport Harbour National Bank, Nev^port Beach, California

Sparta Sanders State Bank, Sparta, Kentucky

Community Bank, Hartford, South Dakota

Western National Bank ofLovell, Lovell, Wyoming

Emerald Empire Banking Company, Springfield, Oregon

Knickerbocker Federal Savings and Loan, New York, New York

State Savings and Loan, Clovis, New Mexico

Valley First Federal Savings and Loan, Van Nuys, California

Indian Springs State Bank, Kansas City, Kansas

First National Bank of Midland, Midland, Texas

The Teamster and Steelworker pension funds that Renda and his partner
Schwimmer skimmed from were deposited at:

First Savings and Loan of Suffolk, Suffolk, Virginia

Westwood Savings and Loan, Los Angeles, California

North Mississippi Savings and Loan, Oxford, Mississippi

Old Court Savings and Loan Association, Baltimore, Maryland

First Progressive Savings and Loan, Westminster, Maryland

Sharon Savings and Loan, Baltimore, Maryland

First Border City Savings and Loan Association, Piqua, Ohio

Renda Meets the Lawyer from Kansas • 115

Bank of San Diego, San Diego, California

Central Illinois Savings and Loan, Virden, Illinois

Montana Savings and Loan, Kalispell, Montana

Virginia Beach Federal Savings and Loan, Richmond, Virginia

Heritage Savings and Loan, Richmond, Virginia

Comstock Bank, Carson City, Nevada

Investors Savings and Loan, Richmond, Virginia

Standard Savings Association, Houston, Texas

Alliance Federal Savings and Loan, Kenner, Louisiana

Valley First Federal Savings and Loan, El Centro, California

Mainland Savings Association, Houston, Texas^''

It was a long list and Manning couldn't even be sure it was complete. What
investigators did notice was that more than just a few of the institutions listed
also appeared on the FDIC and FSLIC's growing casualty lists. In fact, from
January 1982 through June 30, 1985, First United Fund was number one in
the nation in brokering deposits into banks that later failed, 28 in all, even
though in 1985 it was only thirteenth in the nation in volume of deposits placed.'^
In comparison, Merrill Lynch, which brokered nearly 30 times the volume of
deposits, brokered into only two institutions that closed."*

It appeared that Renda had supplied money to nearly all the go-go thrifts in
the country.

By late in 1984 Sam Daily was all too aware that Renda and Winkler had left
him to take the rap. Increasingly paranoid, he was certain they were trying to
frame him. (He would eventually be convicted of conspiracy in the scam.) In
an apparent attempt to short-circuit such a plot. Daily shot off two pages of his
famous prose to the Honolulu police:

Dear Officer,

If you check your files you will find that some time about a year and a half
ago, someone tried to put Mr. Winkler's lights out. Fortunately for Mr.
Winkler they failed. . . .

116 • INSIDE JOB

After a rambling discourse outlining the troubles he'd seen, Daily finally got
to the point:

To that end, I am asking you to investigate this matter so that should one
of Franklin Winkler's numerous enemy's [sicj eliminate his fat body from the
face of our good earth. I will not be the suspect.

A month later Daily sent Winkler a letter that unquestionably outdid all his
earlier literarv' efforts. This letter, which exposed Daily as an anti-Semite (the
letter was referred to by investigators simply as "the fat, slimy hymie letter") also
showed the stress Daily was under:

Franklin:

I just received your letter. It's really not worth commenting on, except to say
that I had a friend and client, who is a criminal psychologist, review your
letter.

My friend is a ]ew, and specializes in studying the behavior of the criminally
insane and mentally ill Jew, under a grant funded by the Nation of Israel.
The purpose of the grant is to identify Jewish individuals who degrade, by
actions and deeds, the standards to which the true Jew adheres.

He said the writer of the letter was obviously a psycho, and probably a fat.
slimy, hymie and scared as hell.

I said to my friend, "what is a hymie?" He replied: "Unfortunately, Sam,
regardless of the high standards to which a group, such as us Jews subscribe,
there is always that minority who degrade the rest of us. They are present in
your Protestant Group, in the Catholic Religion, and in all other religious
and ethnic groups as well. The most demented of the group, to which the
author of the letter under discussion obviously belongs, is referred to by other
Jews as a hymie. I believe the word first appeared in the 1920 dictionary of
the underworld, published in New York."

I congratulated him on his accuracy, and in our conversation he asked me,
"Why is the fat, slimy, hymie so scared?" I replied; "my friend, if you had
done all of the following in three short years, what would your emotional
feelings be."

. . . He may have framed [names deleted] and others into a murder for hire
plot.

... He was a major factor in Bill Lemaster, President of Indian Springs
State Bank, committing suicide, or, "whatever,"

... He stole some $HQO.OOO.OQ from First United Partners Four, with some
W Partners, all of whom are mad as hell.

Renda Meets the Lawyer from Kansas ■ 117

... He stole some $800,000.00 from Haiku Holdings and Haiku Partners,
with some 27 Partners, all of whom are mad as hell,

. . . He and an associate made a phone offer to buy a bank to incite the
bank into making loans which, in part, caused the failure of the bank, and
an alleged loss of $5,000,000.00 to the shareholders of the bank, [Indian
Springs)

... He is being investigated by the FBI on numerous accounts,

. . . He has over HO lawsuits pending in Honolulu alone,

and

. . . He stole in excess of $500,000.00 from me.

The criminal psychologist interrupted me. "Sam," he said, "/ understand the
SOB IS a fat. slimy, hymie, crook who has taken some $^,000,000.00 from
some 50 odd investors in three short years [a reference to Daily's straw bor-
rowers], and that he is probably going to prison, but that doesn't explain
why he is so damned scared."

I replied; "my friend, I spent my time in Korea, Vietnam, Thailand, Laos,
and other parts of Southeast Asia. I have seen literally dozens of good men
die. Some died bravely, most prayed, a few begged; all were scared. But in
all of my experiences, 1 have never seen anyone so afraid of death as Franklin
Winkler. 1 think the answer is simple. The men I have seen die had a cause
that involved someone else; that is to say "Duty, Flag, Country, Family, or
Friends. " They had feeling for others; a sense of loyalty, honesty, truthfulness,
and fairness to those with whom they dealt. Franklin Winkler has only himself
and his Dad, who has one foot in the grave and one foot on a banana peel.
He loves no one, and in turn, no one loves him. He has no God. He has
only greed. "

The criminal psychologist said, "Oh, now I understand. It is as plain as day.
He is a fucking fat, slimy, hymie."

Franklin, if I were you, I'd be scared as hell, too. You've screwed over 50
families, ruined them. When you consider that probably 25% of our popu-
lation, on a random basis, are nuts, there's probably at least 25% of 50
families out there who are capable of spilling your guts and your nuts on the
paking [sic] ramp floor, or in the alternative, putting a .38 slug thru your
demented brain.

Mind you, I have no interest in inflicting physical harm to your fat, slimy,
hymie body. I'd rather hand you a bar of soap or a jar of vaseline as you
walk into Leavenworth [prison], and watch those big mean studs, there for
violent crimes, line up to screw your fat, slimy, hymie ass.

Have a good day Franklin,

Sam

118 ■ INSIDE JOB

Daily's literary thrashings came to naught. He was securely locked in the
web woven by Franklin Winkler and Mario Renda, a web designed to leave
them a safe arm's length away from the partnerships when the Hawaii loans
went into default. On one side of Daily were the FDIC and FSLIC, who were
looking for millions of dollars missing from their crippled institutions in Kansas,
and on the other side were the nearly 50 straw borrowers who had been told to
turn over their loan proceeds to Daily and "not to worr)."

In early 1985 Manning sued Renda, Franklin and Leslie Winkler, Daily
and others for $60 million on behalf of the FDIC and the FSLIC* for causing
the collapse of Indian Springs State Bank and Coronado Savings. The suit
accused them of racketeering and charged that the defendants had conducted
and participated in an "ongoing criminal activity." The Manning lawsuit began
the destruction of Mario Renda's empire.-"

CHAPTER ELEVEN

The End of the Line

Manning filed the FDIC and FSLIC civil suit against Renda and his cohorts in
U.S. District Court in Kansas in April 1985. hi the lawsuit was a graphic
description of Renda's "special deals" at Indian Springs State Bank, Coronado
Savings and Loan, and Rexford State Bank. The Kansas City U.S. attorney's
office, whom Manning had implored months earlier to take the case, was be-
ginning to look more than a little silly. At last the Kansas City Organized Crime
Strike Force took the matter to the grand jury. They contacted Maffeo and
requested that he send them copies of the documents he and Manning had
seized at Renda and Winkler's offices. Maffeo complied.

Nonetheless, Renda continued to do business out of First United Fund in
New York, although things got pretty weird around the shop. First United Fund
now was huge. It managed $5 billion in deposits. Most of its employees had
nothing to do with Renda's wheeling and dealing but had come to suspect much.
On the wall in the bull pen at First United was "the big board," which listed
all the institutions dealing with First United Fund. Over the names of institutions
that employees suspected were involved in one of Renda's "special deals" they
would sometimes stick cutouts of army attack helicopters shooting missiles at
the institution's name. On the side of the helicopters they'd write FDIC or
FSLIC.

Word of the Kansas City grand jury probe sent a clear message to Franklin
Winkler and his father, Leslie. As accomplished con artists, they knew when a
gig was up, and if even the Kansas City feds were onto them, then this gig was
most certainly up. In early 1987 both Franklin and his father skipped the
country.'

Daily was obviously going to be named a defendant in any case brought by
the Kansas City Strike Force, and as usual he was quick to take up pen in his
own defense. This time he described his ideas for subverting Manning's inves-

119

120 • INSIDE JOB

tigation. In a report he called "Goals Achievable Through Use of Public Relations
and Investigati\e Firms," Daily suggested to his cohorts that when Mike Manning
came to Honolulu they "put a tail" on him. "The purpose would be to gather
data on him, associate it with his billing, and try to pick up a little fraud up)on
the Federal Government by the Morrison, Hecker firm, as well as acquiring the
capability to embarrass or discredit them, if need be " He also suggested they
tr>' to get a story on CBS's 60 Minuses that would portray Daily and his straw
borrowers as victims rather than participants in the scheme.

But things were coming apart much too fast, and soon after Maffeo's search
of the First United offices. Renda's own right-hand man and executive vice
president, Joseph DeCarlo, St., began secretly negotiating with Maffeo and the
Brooklyn Organized Crime Strike Force for immunity in exchange for testifving
against his boss. When the talking was over DeCarlo agreed to plead guilt\ to
a single count of conspiracy and another count of tax evasion in return for
immunity on everithing else. He also agreed to testify against Renda in return
for a five-year cap on his sentence.

That was all Maffeo needed. Ten days later, in the early morning hours of
June 16, 1987, a squad of FBI agents swooped down on Renda's New York
mansion armed with a 145-count grand iur\' indictment. The federal agents read
Renda his rights, and in front of his wife and children they handcuffed him and
led him off to a waiting car. Renda was charged, along with codefendant Martin
Schwimmer, with defrauding Sheetmetal Workers Local 83 and Teamster's Local
810 by skimming nearly $16 million off of the $100 million in pension funds
brokered by First United Fund into thrifts and banks between December 1981
and December 1984. Renda and Schwimmer were charged with racketeering,
mail and wire fraud, embezzlement and bribery. Prosecutors said the First United
Fund case was the largest criminal union-pension fraud scheme ever prosecuted
by the Justice Department.

The same day Renda was scooped up in New York — and three years after
Manning had pleaded with the assistant U.S. attorney in Kansas City to prosecute
Renda — a 31 -count grand jury indictment was unsealed in Kansas Cit\', charging
Renda, Franklin Winkler, and Daily (and others) with embezzlement and with
defrauding Indian Springs State Bank and Coronado Savings and Loan of $7
million. It was a bad day for Mario Renda. He now had a two-front war to fight.
Maffeo was prosecuting him in Brooklyn for skimming from the pension funds,
and the Kansas City Strike Force was prosecuting him for defrauding Indian
Springs State Bank.

Renda and his attorney appeared before a federal judge in Brooklyn later
that day. Renda's attorney objected to his client's rough handling earlier that
morning by the FBI: "I understand there is little the court can do to help me,
to raise my strenuous outrage at Mr. Renda's arrest this morning at seven o'clock
in his home in Garden City in the presence of his children. . . . My client has

The End of the Line • 121

asked me to apologize for the manner in which he appears before your honor.
Having been taken out of his home this morning, he wasn't in a position to
choose a tie or put on a suit."

To which a sober-faced judge rephed, "Don't worry, I'm not fussy."
The Brooklyn indictment charged that Renda and Schwimmcr had obtained
union business the old-fashioned way, by bribing union officials. It charged that
once the money was placed at thrifts, First United Fund was paid commissions
that were shuttled to "off the books" bank accounts and not declared. With their
profits in accounts not reflected on the books of First United Fund, the indict-
ment claimed, Renda began lying on his taxes. In 1982 he claimed income of
$2,251,478 for First United Fund when in fact First United Fund made
$3,284,370 that year. In 1983 he told a whopper. He claimed First United
Financial Corporation had made a profit of $137,206, when in fact income that
year totaled $3,429,546. In all, Maffeo charged, Renda and Schwimmer had
received over $16 million illegally from the two pension funds.

October 19, 1987 ("Black Monday" on Wall Street) — three years to the day
after Maffeo's troops showed up with a search warrant at First United Fund's
office in Garden City, New York — Renda was to go on trial along with Sam
Daily in Kansas City. (Franklin Winkler was hiding out in Australia.) Jury
selection had already begun when Renda and his attorney cut a separate deal
with the head of the Kansas City Organized Crime Strike Force. Facing one
count of conspiracy and 29 counts of federal wire fraud, Renda agreed to plead
guilt)' to two counts of wire fraud for a two-year cap on his sentence.

Brooklyn Strike Force attorneys were furious with their Kansas City brethren
because an attorney on the Kansas City Organized Crime Strike Force had
earlier refused a much better offer from Renda: Before he was indicted Renda
had offered to plead guilty to both the Brooklyn and Kansas City charges and
take whatever sentence the judge gave him in Brooklyn in exchange for a max-
imum sentence of two years in the Kansas City case. He had also offered to
repay the FDIC and FSLIC $20 million in cash. But the attorney on the Kansas
City Strike Force refused the deal because he wanted to hold out for a prison
sentence of five to seven years. By the time the trial rolled around, however,
the head of the strike force had evidently gotten cold feet, and Stuart Steinberg,
Renda's friend and attorney, cut a deal. But the offer to repay $20 million was
off because Renda now claimed to be broke. ^ The FSLIC and the FDIC were
left standing at the altar with that familiar empty feeling in the pits of their
stomachs.

"Steinberg told me he couldn't believe how good a deal they were offered,"
an attorney close to the case told us. "He .said they didn't even require Renda
to testify against Daily or the others in the case. "

122 • INSIDE JOB

The Kansas Cih' acceptance of the Rcnda plea bargain particularly angered
the Brooklyn Strike Force attorneys because they had gotten Renda's subordinate,
Joe DeCarlo, to agree to testify against Renda in return for a /ive-year-sentence
cap. How did it look when the main culprit made a better plea bargain than his
lackey?'

The Kansas City Strike Force had let Mario Renda, one of the key figures
in a nationwide scheme to defraud thrifts and banks, off with a two-year slap
on the wrist. We had to wonder. Didn't the Justice Department know what kind
of damage Renda had done at dozens of institutions? Weren't they aware by
now of his associations with others who had swindled thrifts and banks across
the country? (At least one member of the Kansas City prosecuting team certainly
understood the significance of the case when he warned an investigator ominously
after the trial, "This is much bigger than even you know. These are very nasty
people.") Still, the Renda case had, from a prosecutor's standpoint, been
"turned." For the record, the Kansas City Organized Crime Strike Force had
its "conviction."

With Renda now out of the case and Franklin Winkler on the lam in
Australia, that left just Daily and another minor player, Los Angeles in\estor
and syndicator Fred Figge, to face 28 counts of wire fraud and one count of
conspiracy.'' The case droned on for two months. The loss of its star defendant,
Renda, a key element in the original indictment, took all the focus out of the
case. It bogged down badly as prosecutors tried to replace Renda with technical
particulars. They threw over 670,000 pages of documents at the jury. The papers
filled a dozen file cabinets and would have stood ten feet thick. When the trial
ended in December 1987 the jury issued a muddied decision, finding Daily and
Figge innocent of all the wire fraud charges but guilty of conspiracy.

The defense had contended that DaiK and Figge were \ictimized by the
Winklers, who then fled and left Daily and Figge holding the bag. After the
trial some jurors said they agreed. But a defense attorney told a Kansas City
Times reporter he wasn't sure the jury understood what they were doing, since
they convicted the two men for conspiracy, which embraced the wire fraud
counts, but did not convict them of the wire fraud.

"It's quite possible the jury was confused." he said. "I don't know whether
they really knew what was going on or not."

Renda was not going to get off so easily in Brooklyn. Maffeo had ail the
evidence he needed tying Renda to the pension-fund embezzlement scam. And
now, with DeCarlo telling all to federal prosecutors, Renda knew he was trapped.
So he decided to follow DeCarlo's lead and turn against Schwimmer. Renda
told Maffeo that he would testify against Schwimmer in return for consideration
on his sentencing in the Brooklyn case and help with the judge on the Kansas
City case, for which he had not yet been sentenced. Maffeo agreed. Renda
pleaded guilty to racketeering and tax-evasion charges. In return Maffeo agreed

The End of the Line -123

to recommend to the Brooklyn judge that he hniit Rcnda's jail sentence to 25
years and agreed to send notice to the Kansas City judge that Renda was now
cooperating with federal prosecutors. ^

After Maffeo settled matters with Renda, a source close to the case who knew
we were investigating Renda sent us a package. Four years' worth of Mario's
personal desk diaries arrived in a large UPS box one morning. Maybe in looking
them over we'd see some familiar names, she said on a small yellow note attached
to the first page of the foot-high stack.

The package included Renda's daily business diaries from January 2, 1981,
through October 19, 1984 (when Maffeo's forces stormed P'irst United Fund
with a search warrant). Renda apparently kept the diaries on his desk and jotted
down notes on important phone calls, reminders to himself, daily interest-rate
quotes, and just plain trivia. The diaries were peppered with dozens of names
we already knew.

Khashoggi was there. The Dunes Hotel and Casino. Winkler. Daily. Le-
master. Seaside. Teamsters. Ferrante and the Palace Hotel in Puerto Rico.
Steelworkers. San Marino S&'L. Bank of Irvine. Consolidated S&L., Bill Pat-
terson of Penn Square Bank, First Atlantic Investment Corporation, Bureau of
Indian Affairs, California Congressman Tony Coelho, all dutifully noted in
Renda's own scrawl. Also, Morris Shenker was there: "Bill Wiss friend of Morris
Shanker [sic]. " "Morty Shanker deal. " "B of A on Shanker deal." It took us days
to pick through the diaries, trying to decipher Renda's careless handwriting and
impossible spelling.

The scope of Renda's activities seemed to grow with every new piece of
information. Given the allegations that Sal Piga was a Lucchese mob family
associate and that the Brooklyn Strike Force had recorded an alleged Lucchese
mob family member talking about how Schwimmer was helping him launder
money through bearer bonds, we kept wondering if the mob was pulling Mario's
strings. We asked several investigators if Renda was working with or for the mob,
and one day we received a piece of unmarked mail. We opened the large envelope
and found inside the sworn deposition of Lawrence S. lorizzo. Attached was a
handwritten note to us: "If you are focusing on mob bust-outs of savings and
loans, then this is the definitive piece."

There were no shades of gray there, no subtleties to wade through. Larry
lorizzo was a bona fide hood. He was about five foot ten and weighed 300
pxjunds. He had been convicted of bootlegging gasoline on Long Island and he
had fled to Panama, where he was silly enough to cross swords with Colombian
drug lords. Rather than kill lorizzo, the drug lords simply put him on a nonstop
flight from Panama to Miami. As soon as the plane was airborne, they called
the U.S. attorney in Miami and said, "Guess who's coming to dinner."

124 ■ INSIDE JOB

lorizzo had decided at that point to save his skin by talking, and the feds
placed him in the federal witness protection program. In return for protection
he agreed to give evidence whenever he had information about a case. In a
sworn deposition, September 30, 1987, lorizzo told the feds what he knew about
Renda. He said:

Back in 1981, when Renda and the Winklers were first formulating their
linked-financing scheme, lorizzo was the president and principal shareholder of
a mob-front company called Vantage Petroleum Company in Bohemia, New
York. He had been indicted in Suffolk County, New York, for obtaining contracts
to distribute gasoline to turnpike and highway markets by collusive bidding. The
case had been widely reported in the press and no one would loan either Vantage
or lorizzo any money.

This blacklisting was creating cash-flow problems for lorizzo, and a friend
steered him to Leslie Winkler. Leslie told lorizzo that his friend Mario Renda
was a New York "money man" who could help lorizzo with his cash-flow
problems. Leslie arranged a meeting between Renda and lorizzo in late 1981.
lorizzo testified:

During that meeting, held at Renda's home, I explained my financial dif-
ficulties to Mario Renda. Renda told me that he was aware of the cash-flow
problems and had been briefed on the situation by Winkler. Renda also
indicated that he had read about my problems with law-enforcement au-
thorities in the newspapers.

Renda explained to lorizzo how his linked-financing scheme worked:

I understood from our conversation that the.se brokered CDs could be used
with banks that wanted to inflate their cash position, making the banks more
liquid and in a more favorable position to extend loans. Renda told me that
he could arrange for deposits to be put into a bank, if there was a bank that
1 knew well enough to talk to and explain that I could arrange for money
to be deposited if the bank would give me a loan.

Leslie Winkler told lorizzo that Renda was very close to Adnan Khashoggi
and that Renda might be able to assist lorizzo in getting a fat oil contract if
lorizzo used his powers of "persuasion" in New York to help Khashoggi. It
seemed Khashoggi, who owned a home outside New York City, was having
trouble getting the town fathers' approval for a helicopter landing pad at his
home. Renda said that if lorizzo could "remove these obstacles," Khashoggi
would be most appreciative.

At that same meeting, lorizzo later swore, he and Renda exchanged their
Mafia bona fides, with Leslie Winkler telling Renda that lorizzo was with the

The End of the Line • 1 25

Colombo crime family and Rciida in turn bragging that he eontrollcd "a lot of
money being loaned for the benefit of the Paul Castellano family." Castellano
was the New York City Mafia boss for the Cambino crime family.

According to lorizzo, he and Renda came to an agreement under which
Rcnda would place money at a bank of lorizzo's choice, and he chose Central
National Bank of New York (CNBY). I'he bank then made loans to a Pana-
manian shell corporation formed by lorizzo. Renda got $35,000 under the table
from lorizzo as his share in the CNBY scheme and Leslie Winkler got a small
percentage for making the introductions.

"I literally purchased the company's papers from a lawyer in Panama who
maintained them, along with other such entities, on the shelf of a bookcase in
his office in Panama," lorizzo said. He had been introduced to the Panamanian
lawyer by Leslie Winkler. lorizzo told Renda he used the Panamanian shell
corporation rather than Vantage Petroleum for this loan "because I had no
intention of paying the loan off once it was made. Renda then suggested that I
could use Panamanian shelf companies such as Houston Holding in order to
borrow money from other banks in the United States and/or Europe, allow the
loans to go into default, and then collapse these companies into bankruptcy,
thereby discharging the nonperforming loans." What lorizzo described was an-
other classic bust-out.

Renda and Leslie Winkler also tried to enlist lorizzo into their overall scheme
to bust out banks and thrifts. "I understood from these discussions that the
schemes involved getting banks to take in brokered deposits to make loans to
limited partners who would turn the proceeds over to general partners in a
partnership arrangement. . . . There was no intention of repaying anybody as
the general partners had no obligation to pay the loans off . . . the loans would
go into default and as the collateral was not worth as much as it was represented
to be, the limited partners would be left with the responsibility of paying on the
mortgage and/or promissory notes." Though interested in the scheme, lorizzo
had declined "due to other activities which required my presence in New York."

Renda's diaries and lorizzo's deposition fleshed out for us Renda's role as a
deposit broker. Taken together with the activities of his partner Schwimmer with
the Lucchese crime family, they left little room for doubt that Renda's banking
activities were intertwined with the mob's. Taken in a larger context, they were
even more significant. Renda was a fellow who, in a matter of a few short years,
went from tap-dance teacher to multibillion-dollar deposit broker and who was
able to bilk dozens of thrifts and banks out of tens of millions of dollars. Ulti-
mately, he put many of these institutions out of business — all of which he did
with other people's money and newly promulgated government regulations that
deregulated interest rates and thrift rules. The warnings issued by Ed Gray and

126 • INSIDE |OB

a handful of others went unheeded as Congress Hstened instead to thrift lobbyists
who insisted that brokered deposits were not a problem. When the court ruled
that only Congress, not the FHLBB, could limit FSLIC insurance on brokered
deposits, all hope of bringing the "hot money under control vanished. The
next step the FHLBB might have taken would have been to assign more examiners
to watch institutions using large amounts of brokered deposits, but the FHLBB
did not have enough examiners to do the job.

In the vacuum created by regulatory and congressional inaction, Mario
Renda and others like him moved in and quickly subverted the role of deposit
broker to that of extortionist and corruptor. Finding small thrifts struggling to
make it against larger competitors, these brokers put a price on their millions
— a cut. With the promise of huge deposits as the carrot, heretofore honest thrift
officials agreed to accommodate the deposit brokers and their friends, who then
spirited off their share of those deposits, never to be seen again. What did it
matter? they reasoned. The deposits were insured — backed by the "full faith and
credit of the U.S. Treasury."

The laws and regulations covering brokered deposits have not changed as of
this writing. The potential for abuse by unethical deposit brokers like Mario
Renda remains. We had hoped that the downfall of Mario Renda would have
alerted regulators and examiners, but it was not so. In late 1988 — three and a
half years after the collapse of Indian Springs State Bank — when we interviewed
the senior trial attorney at the FHLBB, we sat in shocked disbelief when we
learned that he had no idea who Renda was or what Renda had done.

CHAPTER TWELVE

"Miguel"

The Mafia of the 1980s was a sophisticated $50 bilhon enterprise that employed
financial consultants and attorneys and dealt on a daily basis with international
currency fluctuations and the rise and fall of the Tokyo stock exchange. ' Indi-
vidual Mafia members had average annual incomes of over $200,000. The top
50 bosses made much more.- They traveled in the world of high finance, and
even before thrifts were deregulated, upper-echelon Mafia financiers knew exactly
how they would benefit from deregulation. They were ready to take advantage
of the opportunity as soon as Congress passed the legislation. The lower echelons
of the modern Mafia, a vast and assorted crew of "wise guys"' who were constantly
sweeping the country for lucrative scams, also quickly got the word that savings
and loans had changed. The Mafia on all levels struggled daily with a consuming
need for cash and for a way to launder it. Thrift deregulation fulfilled both of
those needs nicely, making it easier to launder money through multimillion-
dollar development projects, using a thrift as a front, and making it easier to
find thrift executives willing to make risky loans for a piece of the action. Not
only had the rules been drastically eased, but the cops (thrift examiners) were
no longer much of a threat, their ranks having been gutted after state and federal
deregulation.

In our investigation we ran into the mob, or associates of the mob, at
many of the thrifts we examined. Each of the "Big Five" New York fam-
ilies — Gambino, Genevese, Lucchese, Bonanno, and Golombo — turned
up, along with the lesser families such as the Civellas from Kansas Gity,
Garlos Marcello in New Orleans, Santo Trafficante in Tampa, and oth-
ers. Did the leadership of crime families have a sit-down^ one day and
decide to loot S&Ls? Glues that surfaced at dozens of savings and loans
convinced us that some form of coordinated operation existed. The evi-
dence was overwhelming that the Mafia was actively looting S&Ls — in

127

128 • INSIDE JOB

various, widely disparate locations, at the same time, in tlic same ways, often
using the same people.

The mob was also using S&'l^ to launder money. Thrifts' access to brokered
deposits, as well as their new ability to make direct investments in real estate
projects and partnerships, made deregulated thrifts a natural vehicle for laun-
dering large sums of money. Among the most popular money laundering tech-
niques were:'

Buy an asset (a piece of property or a business, for example) with a loan
from a thrift. Repay the loan over a period of time with dirty money.
Once the loan was paid off, sell the asset and the money was laundered.
(Or default on the loan and let the thrift repossess the property. Either
way, you had an explanation for the origin of the money if anyone
should ask.)

A twist that would allow you to both launder money and steal some
from the thrift at the same time was to borrow more on the asset than
you paid for it (and more than it was worth) and then default on the
loan, claiming you lost money on the project. The money in your
possession would then clearly be the product of the defaulted loan and,
therefore, laundered. Plus, you'd have the extra money you had made
by overencumbering the asset (which the thrift would repossess and have
to dispose oO-

The permutations and possibilities were endless, especially when done in
conjunction with a real estate transaction. The American way of handling real
estate transactions was cluttered with 200-year-old ownership instruments like
quit claim deeds, grant deeds, trust deeds, and deeds of reconveyance. Those
arcane instruments might cross the sights of average people only once in their
lives, when they bought their own homes. But to the white-collar swindler and
money launderer, they were the tools of the trade. A routine heist or money-
laundering operation involving real estate was a blizzard of such instruments,
hiding true intentions behind a frenzy of deeds and note filings.''

Thrift deregulation came at a time (the early 1980s) when federal strike forces
had targeted what they believed to be $100 billion' being laundered through
U.S. financial institutions every year. The Bank Secrecy Act, passed in 1970,
had several important provisions that fought against money laundering, including
requiring banks and thrifts'* to report all transactions over $10,000. But working
against the Bank Secrecy Act was the 1978 Right to Financial Privacy Act (and
many state laws), which severely limited what banks could tell law-enforcement
officials.''

The role of savings and loans in money laundering made headlines in 1985

"Miguel" • 129

when results were made public of Operation Greenback, a federal money-laun-
dering probe conducted in Puerto Rico from 198? to 1985. 'I'wo senior FHLBB
officials admitted they had altered bank examination reports that would have
exposed possible currency reporting violations at a Puerto Rican thrift. The
president of the Puerto Rican thrift was also vice chairman of the FHLB of New
York. Senator William V. Roth (R-Del.), chairman of the Senate Committee
on Governmental Affairs' subcommittee on investigations, said in hearings in
July 1985:

It is instructive to note that in 1983 the FHLBB examined 2,185 savings
and loans nationwide, including Puerto Rico, and found two Bank Secrecy
violations (primarily failure to report cash transactions over $10,000),
whereas in the same year the FDIC found ten of the eleven Puerto Rican
banks examined to be in some form of noncompliance with the Act. In 1984
the Bank Board found zero violations out of 1,906 examinations nationwide.
In Puerto Rico alone the FDIC found six of the seven banks examined in
noncompliance. Now this either means that the savings and loans are models
of compliance with the Act, or that the Board just is not doing its job. There
is little question in our minds that the latter is the case: The FHLBB has
consistently dropped the ball regarding enforcement of the Bank Secrecy
Act. In the entire history of the Act, since its passage in 1970, the Board
has referred a grand total of two financial institutions to the Treasury De-
partment for civil penalties, none for criminal penalties.

That complacent environment was nirvana for the mob, and they took
ever\' advantage of the opportunity. But the most prevalent mob activity we
found at thrifts was individual mob members and associates getting and de-
faulting on loans — big loans and lots of them. The mob's survival depended
on a constant flow of money. Before deregulation getting that money was a
hit-or-miss proposition. Wise guys often had to shake down small businessmen.
It was hard work. After deregulation thrifts bursting at the seams with brokered
deposits were like the mother lode and the wise guys were the '49ers. If wise
guys could get sufficient control of a thrift, they busted it out. If they failed
to gain control, they took what loans they could get and moved on to the next
thrift.

The frenetic pace with which they scoured the thrift industry looking for
loans seemed also to be a function of the way the mob had changed since the
1960s. Twenty years ago the mob was still a fairly homogeneous entity made
up of well-recognized "families" who controlled precisely described territories
and took care of their own. Like Fortune 500 companies, mob families had
their own now-familiar hierarchy, with each station bearing its own, sometimes
paramilitary, title like capo, lieutenant, soldier, earner, wise guy. But the 1980s
mob had undergone its own version of perestroika."' To survive a war on the

130 ■ INSIDE JOB

mob tliat was being waged by lav\ enforcement armed with high technology'
tools, wise guys were given far more independence of action. No longer were
they required to get the Godfather's support for every little operation or scam."
Instead, mob operatives used their family associations (and one person might
have several) as a reservoir of talent and influence when conducting an operation.
Also, the young wise guys were far more independent-minded than in the old
days when they virtually worshiped the Godfather. The conviction of 1,000
Mafia bosses and underlings since 1981 created a \acuum into which young,
reckless, independent operators moved (to the dismay, apparently, of older Mafia
members). They tended to organize their own jobs. "Our Thing has turned into
My Thing," testified a former FBI agent.'- When the job was done and the
money in hand, the wise guys' only responsibility was "to do the right thing,"
meaning to be sure they passed enough of the booty up the line of command
to satisfy the family.

In the past the Mafia had had little interest in a conservative thrift industry
that only made home loans. But the deregulated thrift industry was an exciting
new target for wise guys with busy minds always figuring out their next scam.
Throughout our research, then, when we talked to regulators or FBI agents, we
always asked them, "Are you coming across any mob-related people in your
thrift investigations?" Coauthor Paul Muolo, headquartered in New York and
living in New Jersey, got the tip that led us to the mob-related operation we
later decided was most typical of such activity at a thrift. His New York source
had told him:

"Well, check out Flushing Federal Savings and Lx)an over in Queens. Drop
the name Rapp and see what happens. By the way, his real name's not Rapp,
it's Hellerman. Michael Hellerman."

In late 1972, Michael Hellerman and his wife, Mar\', a tall slender woman
in her late twenties, had exited their car off the Cross Island Parkway and pulled
into the driveway of their home in Bayside, Queens." A stockbroker in his mid-
thirties, Mike Hellerman had chosen to settle in this upper-middle-class enclave
because of its relative proximity to New York City. Bayside was close enough
that Hellerman could enjoy the city's nightlife while staying in touch with his
clients, but far enough removed so he could escape the hustle and bustle. A
suburb speckled with well-groomed single-family homes and small garden apart-
ments, Bayside was a perfect place for Michael Hellerman to blend in with other
professionals commuting daily to New York. It was also a perfect place for
Hellerman to hide from his stock clients, who, perhaps, weren't prospering from
some of Mike's recent trades.

Hellerman and his wife, returning from dinner, pulled their Cadillac into

"Miguel" ■ 131

the driveway and climbed out. Vout police officers came over to the couple as
a crowd of curious neighbors watched.

"You Mike Hellerman?" a sergeant asked.

"Yeah,"

The police led Hellerman and his wife to the house. "It looks like someone
shot up your house, Mr. Hellerman," one officer told him. The Hellermans'
home had been machine-gunned.

Only a few days earlier the couple had been held up at gunpoint in their
home.

That night Hellerman's wife, Mary, became hysterical. The couple packed
up their belongings and children and, using phony names, checked into the
Diplomat Hotel across the river in midtown Manhattan. To neighbors and the
police the event seemed out of place in the quiet neighborhood. But Mike
Hellerman knew exactly what had happened and why. He also knew he needed
help.

On October 19, 1972, two days after the shooting, he called a contact he
had at the Federal Bureau of Investigation and baited his hook. He would be
willing to tell the F"BI everything he knew about the mob's activity on Wall
Street, he said, if he could be guaranteed protection. He assured them he had
plenty to tell and that members of the organized crime families he'd been dealing
with wanted Mike Hellerman dead.

As his neighbors in Bayside would later learn, Mike Hellerman wasn't just
any stockbroker. He was the mob's stockbroker. And he had enough information
on mob stock scams to send key members of the Lucchese, Colombo, and
Gambino crime families to prison for years. But it wouldn't be easy for Mike.
One of Hellerman's best friends was John Dioguardi, better known as Johnny
Dio, a big labor union racketeer who was reportedly a member of the Lucchese
crime family. Dioguardi had once been instrumental in helping Jimmy Hoffa
become president of the Teamsters Union. Dio and Hellerman were tight — so
tight in fact that Dio was Hellerman's "protector" in the mob. From the late
1960s, up until he was sent to prison in October 1972 for bankruptcy fraud,
Dio made sure that no harm came to Mike as Hellerman pulled stock swindle
after stock swindle for the families.

Over the years Hellerman's stock scams had netted millions for Dio and
mobsters like Vinnie Aloi, reputed to be the head of the Colombo crime family.
There seemed no limit to the ways Mike Hellerman could turn a buck on a
stock swindle. Hellerman bribed traders, artificially inflated the price of stocks
by setting up phony buyers, and sold artificially inflated stocks at unheard-of
profits. Other times Hellerman formed companies that had little or no assets,
sold thousands of dollars' worth of stock in them, pocketed the profits, and left
the buyers holding an empty bag when the bottom fell out of the stock price.

132 • INSIDE JOB

It seemed that no matter how many people he burned, Hellerman rarely got
burned himself. Sometimes he sold stolen bonds. In other scams, using a phony
company he'd created, he'd get a loan from a bank using stolen bonds as col-
lateral. And in alnio.st every scam the mob was there, riding a crest of stock
scams engineered by their Wall Street wizard Michael Hellerman, who later
referred to himself in his autobiography as a nice Jewish boy gone wrong.

From the mid-l%Os up until late 1972, Hellerman had inhabited an un-
derworld ruled by men like Dio and Vinnie. And he had no regrets. Along the
way he had met a lot of people and seen a host of things that he would never
have seen if he'd taken his father's advice and become an accountant. '^ Heller-
man not only had helped the mob swindle millions but he had been involved
in two major political scandals as well, including a brush with Watergate. He
described the scandals in his 1977 biography. Wall Street Swindler.

In 1969 two aides to then House Speaker John W. McCormack had been
convicted of attempting to peddle their influence with the SEC on behalf of a
Hellerman company. And then in November 1971 Hellerman was implicated
in a Watergate-related case, although he never was indicted. Robert Carson, an
administrative aide to Hawaii Senator Hiram Fong (Carson had been president
of the Honolulu Stock Exchange and also chairman of the Hawaiian Republican
Party for eight years before he became Fong's aide), tried to quash the Justice
Department indictment of Hellerman, Dio, and others in return for a $200,000
bribe. Richard G. Kleindienst, then deputy attorney general during the Nixon
administration (Kleindienst later became attorney general), testified that Carson
had offered to donate $100,000 of the money to the Committee to Re-Elect the
President (CREEP) if Kleindienst killed the indictments against Hellerman and
the other organized crime figures, including Vincent Aloi, Johnny Dioguardi,
and Carmine Tramunti, reportedly head of the Lucchese family. Carson was
eventually indicted and convicted.

Whatever else one might say about Hellerman's life, it had not been boring.

The son of a Polish immigrant, Hellerman grew up in Brooklyn and Long
Island. When he finished college he headed straight for Wall Street. He was an
imposing figure, over six feet tall and 200 pounds. He also was a quick study,
with an uncanny ability with numbers, and he prospered almost from the start.
His philosophy, he would later say in Wall Street Swindler, was simple.

"One of the first things I learned was that the investor, the buyer of stocks,
is a sucker. He's just a turkey waiting to be plucked. He is totally at the mercy
of his broker, who can manipulate him in such a way that the broker can
wind up making more money than the customer and use the customer's money
to do it."

By the time Hellerman was 22 the newspapers were referring to him as the

"Miguel" ■ 133

"Wizard of Wall Street." The more Hellerman made, the more lie spent, and
the money went quickly. Caught up in the glamour of Wall Street in the early
1960.S, Hellerman always wanted more and his need for money became an
addiction. Soon Hellerman was bribing stock clerks and taking his customers
(and even his fellow brokers) for a ride. But some of Hellerman's honest customers
complained and word got back to the Securities and Exchange Commission. At
the age of 24 he was barred from engaging in the securities business in New
York state.

By 1963 Hellerman, who'd developed a fierce gambling habit, was hanging
out in Las Vegas, a down-and-out compulsive gambler. Cheating on Wall Street,
Mike Hellerman was often a winner. But at the gaming tables, particularly the
craps tables in Vegas, he was in way over his head. Following a drunken binge
one night, Hellerman woke up thinking he'd won $15,000 only to discover that
he'd dropped $240,000 at craps the night before.

In Wall Street Swindler. Hellerman said that in Vegas he fell in with the
mob. He gravitated to Moe Dalitz, an old bootlegger and an alleged member
of one of Cleveland's organized crime families. Dalitz wanted to hire Hellerman
to work at his Vegas Desert Inn Hotel and Casino. Dalitz and Hellerman also
cooked up a plan to open a hotel and casino in Reno. The deal flopped when
Hellerman couldn't come up with a gambling license. It seemed that, like the
SEC, the gaming control authorities in Las Vegas had certain standards that
Mike didn't meet.

During his Las Vegas days in the mid-1960s Hellerman made friends with
mobsters like Johnny Roselli, who was a one-time member of Al Capone's gang
and the right-hand man of Sam Giancana, Chicago's Mafia boss.'^ But Heller-
man's gambling problems — as well as his as,sociation with underworld crime
figures — escalated, and it was only through the efforts of a special friend, Hel-
lerman would later recall, that he was able to escape Vegas, at least for the time
being, and return to New York, where Hellerman hoped to put his life, and
scams, back together.

That special friend, Hellerman's savior, was Jilly Rizzo, who was almost 20
years older than Mike. Stocky Jilly Rizzo has often been described as Frank
Sinatra's right-hand man, valet, personal body guard, and best friend. Rizzo
and Hellerman became fast friends in spite of the fact that they appeared to have
very little in common. Whereas Hellerman was a smooth talker, Rizzo was gruff
and unrefined, which he made up for by being outgoing and gregarious. But
Rizzo, despite his rough exterior, had a knack for making people, especially his
restaurant customers, feel at home. He had slick, greased-back dark hair and he
was starting to bald. As Hellerman said in his biography, "Jilly wasn't a handsome
man." But Hellerman added, "If Jilly had a mission in life, it was to please
Frank Sinatra."

Former mob enforcer turned informant Jimmy "the Weasel" Fratianno re-

134 • INSIDE JOB

called, in his biography, a call he got from Rizzo that seemed to illustrate Rizzo's
relationship with Sinatra. Fratianno said Rizzo told him:

"Jimmy, Frank has asked me to speak to you about a jerk that used to work
for him as a security guy. A real fucking animal. Hit a guy in the jaw and
collarbone with one punch. . . . Frank fired him and the guy's had a hard-
on for Frank ever since. He's been spouting off some bullshit to the scandal
sheets. ... we want this guy stopped once and for all. Know what I mean?"

"You want the guy clipf>ed? Just say the word and the motherfucker's good
as buried."

"No," Rizzo said. "Not right now. Just hurt this guy real bad. Break his
legs, put the cocksucker in the hospital. Work him over real good and let's
see if he gets the message "'^

Hellerman had first met Rizzo when Rizzo was running Jiily's Restaurant,
a popular New York nightspot that drew both entertainers and members of New
York's well-known organized crime families. Jilly mingled w ith both — with equal
success. Over the next 20 years Jilly and Mike would remain friends and Mike
would make the bulky, tough-looking Rizzo an integral part of his life.

In 1963 Rizzo and Hellerman opened a restaurant together in New York
called Mr. J's, named appropriately for Rizzo. The new Rizzo-Hellennan res-
taurant was a smashing success, at least at first, and Hellerman made even more
contacts with men who made their living as part of the underworld. Hellerman
later said he also met and became somewhat friendly with Rizzo's friend Frank
Sinatra. And the Hellerman charm didn't fail him. Soon Sinatra was affection-
ately referring to Mike Hellerman as "Miguel." Mike, still in his early twenties,
even proposed a joint-venture casino deal with "Old Blue Eyes." The deal never
came off, but Sinatra reportedly liked the kid's pluck.

By 1968 Hellerman knew he wasn't going to get rich running a restaurant,
and he decided to try to get back on Wall Street, where the money was. The
SEC had barred him from the securities industry because of his earlier stock
swindles, but that wasn't really a problem. To keep his name out of the deal,
Hellerman set up a firm in the name of an old college chum who knew absolutely
nothing about the brokerage business, and he hired a stable of brokers through
whom he could move stocks.

During his earlier fling on Wall Street, Hellerman's mistake had been in
trving to do his kind of business with the general public. They had taken umbrage
and had turned him in to the SEC. Hellerman would have no such finicky
customers this time around. Instead, he recruited customers like Johnny Dio
and Vinnie Aloi. From 1968 to 1972 Hellerman pulled one stock swindle after
another. On some of the deals he even swindled lower-level mobsters. Some

"Miguel" • 135

complained to Aloi about tlie deals, but no harm ever came to Hellerman because
Dio had become liis "■protector." For a piece of the action Dio would make sure
no harm came Mike Hellerman's way. Besides, the two men had actually become
ver)' close friends.

Hellerman was raking in the money once again. And his old spending habits
came back, too, just like it was yesterday. He was spending $10,000 a week in
pocket change — jewelry, furs, expensive furniture and restaurants. Life was in-
deed blessed for Michael Hellerman. But again the good times were not to last.
hi October 1972 Dio was headed to prison for bankruptcy fraud. The night
before Dio surrendered to U.S. marshals he and Hellerman got together at Dio's
house in Bayside for a final farewell with friends. Hellerman was worried that
with his protector in prison and with the SEC and FBI eycbaliing his operation,
his life was in danger.

"What's bothering you, Mike?" Dio asked Hellerman in private. "We knew
this would happen sooner or later."

"I know," Hellerman replied. "But I'm scared. I'm going to move the hell
out of New York as fast as I can. There are a lot of guys waiting for me now
because you're going to be gone. "

Hellerman was right. The mobsters he'd been swindling had a feeling that
federal investigators from the SEC and the U.S. attorney's office in Manhattan
were moving in for the kill. They were mad at Hellerman, not only for some
of the unfavorable deals he'd cut for them, but also because, to save his own
skin, Hellerman might be willing to sell out his old friends, including Dio, Aloi,
and even Carmine Tramunti. There was plenty of sentiment within the families
that they had better get to Hellerman before Hellerman got to them. They
machine-gunned his house to warn him to keep quiet.

But the warning had the opposite effect. Hellerman quickly decided to cut
a deal with New York Assistant U.S. Attorney Robert Morvillo, an old high
school football buddy. Morvillo was now on the other side of the law, as head
of the criminal division for the Southern District of New York. '"" The deal was
this: Hellerman would get at least six years in prison for three large stock swindles
that he masterminded, and he would testify against Tramunti, Aloi, and even
his good friend Johnny Dio. Hellerman agreed. And in time all three would be
sentenced to lengthy prison sentences because of Hellerman's testimony.

In the fall of 1973 Hellerman went from trial to trial as a protected govern-
ment witness, testifying against Carmine Tramunti, Vinnie Aloi, and finally
johnny Dio. But by this time Michael Hellerman, a confessed and convicted
felon himself, no longer existed. Under the wing of the federal witness protection
program, Michael Hellerman had been transformed into Michael Rapp. As far
as he and the U.S. government were concerned, Mike Hellerman was history,
just a sealed file buried in the voluminous records of Foley Square in lower
Manhattan. His new identity was created for him by the U.S. Marshal's Service.

136 • INSIDE JOB

With tongue in cheek, they gave him the name "Rapp." New Social Securit\
cards were issued, a new birth certificate, driver's license, school records, personal
histor>', everything short of a new bar mitzvah. (From this point forward we refer
to Michael Hellerman as Michael Rapp.)

Mike Rapp also did a little time in prison, a situation he abhorred. When
he was temporarily released in late 197? to testify against Dio, he swore he'd
"never commit another crime in my life." He begged Mor\illo and the U.S.
attorney's office not to send him back to prison. After the Dio trial Rapp went
to a federal safe house in New England until he was scheduled to testify again
in another trial involving Dio. To ingratiate himself with his captors, Rapp
cooperated to the hilt. Rapp had no stomach for being a courageous prisoner of
war. He sang like a canary. He was responsible for the indictment or conviction
of more than 90 men.

What happened to Rapp after he finished testifying on the government's
behalf is not clear. His life was in danger, and his best bet was to dissolve into
his new identit)'. What is known is that he did \ery little prison time for the
stock swindles he masterminded. Since he had testified against members of the
mob, the U.S. attorney's office believed Rapp wouldn't dare step out of line.

By 1977 Rapp was living a quiet, simple life in Massachusetts, according to
law-enforcement officials. Divorced from Mary, he remarried, opened a restau-
rant in Boston, and tried to settle down. With Thomas C. Renner, a repxirter
for the Long Island-based daily Newsday, he penned Wall Street Swindler, an
autobiographical account of how a nice Jewish kid from Brooklyn got greedy,
befriended mobsters, and pulled an untold number of stock scams on their behalf.
(Ironically, some of Rapp's methods outlined in his book would later be used
by convicted inside trader Ivan Boesky.) Nowhere in the book did Rapp disclose
where he lived or what exactly he was up to. He wrote, "My future, whate\er
it may be, will depend on what I am willing to contribute. I have the tools, the
education, and the mind to make a better life and I'm trying harder now than
ever before in my life."

He also wrote, "I knew that no matter what the temptation, I would never
commit another crime in my life. Those three short days, a flickering moment
in my sentence, were enough to convince me that all the money, all the mink
coats, jewels, fancy cars, and restaurants weren't worth one day in that prison
again."

High-sounding promises aside, Rapp soon abandoned the straight and narrow
path he had set for himself After a run-in with Massachusetts re\enuc agents
over the possibility that perhaps his Boston restaurant was underpaying its fair
share of taxes, Rapp left in a huff and moved to Bar Harbor Island in Florida,
just north of Miami, where in 1983 he resumed his relationship with Rizzo and
made a host of new friends. He had to. He'd sent all his old friends up the river.
No matter, his new friends were eager to do business with him. Soon, law-

"Miguel" • 137

enforcement officials said, Rizzo introduced Rapp to Anthony Delvecchio, "* a
tall hulk of a man who weighed in at about 240 pounds and used to work as a
bouncer in one of Rizzo's restaurants. Delvccchio, in his late forties, grew up
on Delancy Street, a tough Italian neighborhood in New York's Little Italy. He
later testified that Rizzo introduced him to Rapp in a Miami restaurant called
Apples, which Rapp and reputed mobster Phil "Cigars" Moscotta had recently
purchased.

Moscotta (who also went by the name Brother Moscotta), Rizzo, Delvecchio,
and Rapp had dinner at Apples in May 1984 and one topic of conversation,
Delvecchio later recalled, was Flushing Federal Savings and Loan in Flushing,
Queens, New York. Rizzo and Delvecchio told Rapp that World Wide Ventures
Corporation, in which Rizzo and Delvecchio said they held a stake, had just
obtained an easy $500,000 loan from Flushing secured by some land in the
Pennsylvania Poconos.'" Delvecchio and Rizzo said World Wide had supplied
Flushing Federal with an appraisal report that said the land, a hundred acres,
was worth $2 million. The value was based on the fact that some day World
Wide Ventures planned to build a hotel, timeshare and sports complex on the
site. In fact, the land was worth only about $500,000 at the most, maybe less,
thrift executives said later, yet the president of Flushing Federal had approved
the $500,000 loan.-" World Wide was a holding company in Orange, New
Jersey, that invested in other business. It didn't matter that some of the businesses
never got off the ground — like World Wide's self-chilling soda can.-'

When Rapp was told the Flushing Federal story over dinner, he must have
been intrigued. It sounded like his kind of bank. And it wasn't too far from
Bayside, where he'd almost been murdered 12 years earlier. Rapp listened care-
fully. He also told Delvecchio he had access to European funds through a
company called Swiss International, which was controlled by a man named
Heinrich Rupp.

"If you need some money for the project in the Poconos, maybe I can help,"
Rapp said, according to Delvecchio. "I have a friend who's close with Rupp."

Rupp did become involved in another deal that they had on the table that
night, a deal that involved the Aurora Bank in Denver and )ohn Napoli, Jr., a
man alleged to have close ties to New York's Lucchese crime family. Rupp and
Napoli would both later be convicted of bank fraud for this scam. Court doc-
uments showed that Napoli had an opportunity to buy $9 million in stolen
currency for $2 million from a contact named "Al." Napoli had arranged with
Aurora Bank officers for the bank to loan millions of dollars to various people,
and regulators later claimed that Delvecchio and Rizzo agreed to borrow
$350,000 from Aurora.-- (Later, when Rizzo was sued by the FDIC for his
involvement in this deal at Aurora, he refused to answer questions and invoked
the fifth amendment because he said he was the subject of a criminal investigation
in another jurisdiction.)

138 • INSIDE JOB

Rupp claimed to be a longtime CIA contract pilot. His attorney told us that
in the 1970s he flew for Global Air International out of Dallas. When Rupp
was convicted of bank fraud in connection with the Aurora Bank case, a witness
for the defense told the judge that the CIA commonly used financial institutions
to launder drug money or scam loans before sending the money off to the Contras
or to various other covert purjxjses.-' Among the financial institutions the witness
named as having been used in this way were Aurora Bank and Flushing Federal.-''

Rapp apparently decided that taking out loans, or getting a share of loans
that he arranged for others, might be a promising way to make ends meet. Clearly
something new and exciting was happening in the once stodgy world of savings
and loans, something that would welcome his kind of expertise. So Mike
Rapp — former stockbroker to the mob, former jailbird, former informant —
became Mike Rapp, loan broker and matchmaker. In short order a colorful cast
of characters found their way to Mike's door. Delvecchio said a music publisher
from Beverly Hills named Steve Metz arrived with big plans to buy his own
bank. Texas investor Frank Ncgrelli, who was interested in oil and gas leases,
also showed up, as did Owen Beveridge, a deposit broker from Long Island, and
William Smith (he claimed to be a former CIA agent), who owned a travel
agency that sponsored, among other things, gambling junkets to the Dominican
Republic. And Rizzo and Delvecchio were around. Delvecchio said they all
had business propositions for Mike Rapp — everything from investments in oil
and gas leases to the purchases of banks, S&Ls, hotels, and casinos. For a finder's
fee, or a piece of the action, Rapp's job was to put these men's ideas together
with money to fund them. (Delvecchio has since sued Rapp over the collapse
of their business arrangements. ) }

Another visitor to Rapp's home/office was Lionel Reifler, a man whose
background was similar to Rapp's. In 1970 Reifler had pleaded guilty to stock
fraud; in 1975 he pleaded guilty to selling unregistered securities and was sen-
tenced to two years in prison. In 1973 Reifler had drawn the attention of in-
vestigative journalist and author Jonathan Kwitny, who gave him less than
honorable mention in his book on white-collar crime in America entitled Foun-
tain Pen Conspiracy. Reifler was now running a realty office in Fort Lauderdale,
Florida.

These characters gravitated to Mike Rapp because he knew how to get mone>'.
Besides cutting his teeth on Wall Street, he had studied under master bank fraud
artist Erwin Layne. a swindler who pulled scams for X'incent Gugliara, a soldier
in New York's Colombo crime family. Layne's specialty involved a scam where
he'd take possession of stolen bonds (usually obtained by the mob) and then
move the bonds to banks and obtain loans against the bonds. During the days
when he was still Michael Hcllcrnian, Rapp had taken special note of the way

"Miguel" ■ 139

Laync operated. Hellcrman even described Layiie's system of scamming banks
in Wall Street Swindler.

Speaking of Erwin Laync, Hellerman wrote, "... bis next step was to borrow
$10,000 or $15,000 from one of tbe wise guys, select a bank, and then open
an account at that bank. He established himself at that bank as a construction
executive and became friendly with a vice president of the bank. Once that
friendship was established Layne began a carefully choreographed program of
wining and dining the banker, providing a prostitute (whom the banker was led
to believe was Layne's wife) and paying her to seduce the banker behind his
back in a la\ish]y furnished apartment. . . . The setup for the scam might last
six months, until Layne was convinced that he had the banker on the hook. ..."

The banker thus compromised, the final step was to get large loans from
the bank. The banker, torn between guilt and fear that Layne would find out
he was sleeping with Layne's "wife, " would bend over backward to accommodate
Layne. Any resistance on the part of the banker was weakened by the "wife,"
who would beg the banker to make the loan so they could continue their affair.
Once the loans were in hand, the only thing left for the swindler to do was to
pull up stakes and leave town. It was a classic bank scam.

In the spring of 1984, Rapp had an idea that didn't stray too much from
Lavne's blueprint. Rapp, of course, would add some variations of his own, but
the end result would be the same. His target would not be a bank, however. He
was intrigued by thrift deregulation and the stories about Flushing Federal Sav-
ings, and he had decided to make friends with Carl Cardascia, the president of
Flushing Federal.

CHAPTER THIRTEEN

Flushing Gets a Bum Rapp

Car! Cardascia, in his forties, had been president and chief executive officer of
Flushing Federal Savings for about a year. Cardascia told friends he had never
finished college and hated paperwork. Still, he had been a dedicated employee
of the S&L since the late 1960s when he had begun working his way up the
Flushing Federal ladder. He was no financial genius, but operating a savings
and loan association did not exactly require an MBA. Cardascia picked close
friend Ronald ). Martorclli as his right-hand man, making him a vice president
and Flushing's chief lending officer. Prematurely balding, Martorelli was small-
framed and wore glasses. He was a graduate of Hofstra University and, like
Cardascia, had worked his way up the ranks at Flushing Federal, starting as a
part-time teller in 1974 when he was just 17.

A federal judge would later describe Cardascia as a "careless," "incomp)etent"
thrift president. He didn't like to waste his time studying financial statements
and credit reports. Instead, he just made "an informal t)pe of analysis within
his own mind" about whether an applicant for a loan would be able to repay
or not, Martorelli explained later. By mid- 1984 Flushing Federal wasn't doing
well. It was growing quickly (it had assets of about $578 million, thanks to
brokered deposits) but was losing money. The Federal Home Loan Bank of New
York slapped Cardascia with a supervisory agreement that forbade the S&L to
make loans of more than $500,000 to out-of-state residents and more than $1
million to New York state residents. Flushing was also ordered to improve the
documentation behind its loans.

But soon thereafter a realtor introduced Cardascia to World Wide Ventures.
Cardascia apparently did some of his "informal analysis within his own mind "
and decided World Wide Ventures looked like a pretty good risk. Court records
showed Flushing Federal gave World Wide not only the $500,000 loan that
Rizzo and Delvecchio later told Rapp about but also granted the company a $5

140

•rf

Flushing Gets a Bum Rapp '141

million line of credit. What Cardascia's informal analysis had not disclosed was
that World Wide Ventures, according to regulators, was for the most part worth-
less. It had .some rights to the bare land in the Poconos, but that was about it.
On the surface World Wide looked like a company on tiie way up. But authorities
would later claim that behind the scenes a friendly stockbroker was actually
manipulating World Wide's stock and artificially inflating its price.

In June, World Wide President Lorenzo Formate brought a Florida busi-
nessman friend of his to Flushing Federal's corporate headquarters in New York
and took him up to Cardascia's office on the second floor.

, "Carlo," Formato said, "I'd like you to meet a friend of mine, Mike Rapp."

"Glad to meet you, Carlo," Rapp said, shaking Cardascia's hand. Michael
Rapp told Cardascia that he was a businessman in search of financing for some
projects he was considering, including the purchase of People's National Bank
up in Rockland County. And there was a bank out in Oklahoma that he and a
partner of his from Texas had their eyes on. Plus, he was looking at the purchase
of oil and gas leases in Texas. Rapp mentioned that he could arrange for large
deposits to be brokered into Flushing Federal. Cardascia, who evidently trusted
Formato, listened to Rapp's rap. Over the next month or so, according to federal
investigators, Rapp successfully applied the Erwin Layne formula to Flushing,
with a couple of twists and flourishes of his own, of course.

Rapp began by wining and dining Cardascia and, according to one federal
agent, even took the Flushing Federal president to Atlantic City on a little
gambling trip. Although nothing was ever made of it, there were rumors that
Rapp began buying presents for Cardascia and his wife — a set of golf clubs and
a fur coat. Delvecchio said that along the way Rapp gave Cardascia an earful
about his business plans. Then Rapp invited Cardascia and his wife to a benefit
cocktail party in New York where Rapp's old friend Frank Sinatra was supposed
to sing a song or two. Sinatra never showed, but his wife did, and since it didn't
take much to impress Cardascia, that did the trick.

Rapp knew Cardascia's S&L was in trouble and needed money, and Mike
knew where to get it. Delvecchio told authorities that Rapp, together with money
brokers Owen Beveridge and others (Rapp would eventually tap into First United
Fund too), made sure that Flushing received all the brokered money it needed
in order to have enough cash to make loans to Rapp and his associates. Initially,
a meeting was scheduled at Flushing Federal to talk about bringing money into
the ailing S&L. Rapp, Reiflcr, and Delvecchio went into Cardascia's office, and
Cardascia buzzed his young protege, Martorelli, who then met Rapp and Reifler
for the first time. Everyone shook hands. During the discussion Rapp told
Cardascia he could bring at least $13 million in CDs into Flushing.

Martorelli and Delvecchio would later tell authorities how the deal worked:
Rapp arranged to have the money deposited at Flushing free of any brokerage
fees — all Flushing had to do was agree to loan to Rapp and his partners $250,000

142 • INSIDE JOB

of each million Rapp brought in. (Normally, the financial institution paid a 2
percent to 5 percent brokerage fee for brokered deposits it received. Rapp was
taking a page out of Renda's book and offering to place the deposits at the
institution without cost to the thrift. )

Rapp's friends started shaking the Flushing Federal money tree in June 1984
when according to the FSLIC, a World Wide associate was granted a $250,000
line of credit and Reifler's realty company got $250,000. Martorelli said no credit
checks or applications were ever filled out by the hso. All of the loans were
unsecured. No sooner had Flushing shelled out $250,000 to the World Wide
associate than the borrower's name apjjeared in the newspaper as the owner of
a warehouse full of counterfeit highway tokens seized by FBI agents in Brooklyn.
He was promptly arrested. Martorelli rushed into Cardascia's office waving the
article about the arrest.' Cardascia looked it over. "I'll look into it, Ronnie.
Don't you worrv'. I'll take care of it," he reportedly said.

Federal authorities claimed that even as the money flowed Rapp continued
bringing new loan proposals to Flushing. The money from these loans, Del-
vecchio said, was supposed to go into high-yield oil and gas leases, and Rapp
and his partners were buying a bank in Oklahoma. Also, Rapp, Rizzo, and
Delvecchio were supposedly going to buy a hotel and casino in the Caribbean.
All these investments would turn big profits and Flushing would get its money
back, plus. By that time Rapp appeared to have gained Cardascia's total confi-
dence. After all. how could Cardascia not trust a man who knew Frank
Sinatra — personally? Rapp reassured Cardascia that he, Michael "Miguel" Rapp,
would distribute loan proceeds to the borrowers he lined up. Martorelli said
Rapp also promised Cardascia that he'd make sure the interest on the loans was
paid in a timely manner.

With Flushing Federal under the watchful eye of federal regulators, Rapp
couldn't take out too many loans under any one name without drawing suspicion
so he set up a maze of phony corporations, prosecutors later proved. Through
that paper corporate empire he and his friends could borrow money without
putting their own names on paper. Rapp's scam at Flushing was just one big
Ponzi scheme — regulators claimed he took out new loans to make payments on
old loans and he and his ft-iends pocketed any difference. Delvecchio told au-
thorities that when Rapp set up a new company he'd show up at Flushing's
headquarters, sometimes with Smith or Metz, other times with Rizzo and Del-
vecchio. They'd fill out a loan application for the new front company. Delvecchio
said, and be out the door with a Flushing Federal check in hand the same day.

For example. Glen Grotto Inn, a Rapp company that was a mere shell with
little or no assets, got a whopping $300,000 line of credit out of Flushing which
later was increased to $700,000. By October 1984 Rapp was feeling so brazen

Flushing Gets a Bum Rapp • 1 43

that he even took out a $350,000 line-of-credit loan using his own name. He
just walked into Flushing and filled out a loan application. Martorclli said
Cardascia gave the nod and Martorclli cut the check. On that particular day
Rapp brought his pal Jilly Rizzo with him. and regulators said Rizzo took the
opportunity to pick up a quick $200,000 loan for himself while he was in the
neighborhood.

Notwithstanding Martorelli's growing concern, Cardascia continued to turn
on the loan spigot for Rapp and his friends. But Martorclli said that in late
October. Cardascia (who later claimed he did not know at this time of Rapp's
other life as Michael Hellerman) finally voiced concern to Rapp that regulators
were due to inspect the S&L's books soon and if Rapp didn't come up with some
collateral for all the loans he was arranging, there might be trouble.

"Carlo," Rapp reportedly said to Cardasica, "don't worry."

Rapp certainly wasted no time worrying. No oil leases ever materialized,
nor did any of Rapp's other ventures that he spun elaborate stories about to
Martorclli, who said he became increasingly skeptical. But Rapp feathered his
own nest well. He lavishly furnished his Bar Harbor home and showered his
new wife, Janet, with expensive diamond broaches, rings, and gold watches.
Delvecchio said he saw Rapp refurnish his Florida ranch house with Flushing
Federal loan proceeds and buy what he'd heard amounted to half a million
dollars' worth of jewelry for his wife. In November, Rapp was having lunch with
Delvecchio at the Waldorf-Astoria on Park Avenue in New York when a delivery
boy arrived at Rapp's lunch table with two fur coats. Rapp told him to take the
furs up to his wife's room. Janet Rapp soon returned the kind gift by throwing
a party for her loving husband. The party cost around $100,000 but no matter,
she just wrote a check, a Flushing check, ^ Delvecchio said.

By late October 1984 Cardascia was insisting that Rapp come up with col-
lateral to cover the loans he'd received from Flushing. Most were still current,
mainly because Rapp was using part of the newer loans to make payments on
the others,' but Rapp probably figured he'd better cover the loans with something
that at least looked like collateral before Cardascia had a nervous breakdown.
Stock seemed like a good idea, so Rapp worked out a deal with a friend in Texas
who needed a loan. The friend lent Rapp stock in a company he owned in
return for a later loan. Rapp then put the stock up as collateral for most of the
lines of credit he had previously arranged at Flushing. And while he was there
he took the opportunity to get another $350,000, regulators later charged. (The
stock later turned out to be worthless. )

But that was just a temporary fix and Rapp knew he would soon need a new
source for loans. Flushing Federal was tapped out. Also the Flushing Federal
loans were all coming due soon and he needed a way to deal with that too.
Rapp began looking for a bank or savings and loan he could buy and control
himself. He had been trying to set up a deal for Jilly Rizzo and Steve Metz to

144 > INSIDE JOB

buy the People's National Bank in Rockland, Count\', Raniapo, New York.
Rizzo and Metz were to be appointed to the bank's board of directors. Rapp said
he had received assurances from his old friend Frank Sinatra that if Rizzo
acquired the bank, Sinatra would serve as a director. Rapp was also telling
interested parties that he had director commitments from singer Sammy Davis,
Jr., and former President Gerald Ford. A lot of big talk . . . but no deal.''

Then a better opportunity to buy a bank came along at the end of 1984,
and Rapp decided the lea.st Flushing Federal could do for him, after all he had
done for Flushing Federal, was to loan him the down payment. Martorelli said
Rapp walked into Flushing accompanied by William Smith, the self-acclaimed
ex-CIA agent. They clustered together in Cardascia's office. After a short time
Cardascia buzzed Martorelli on the office intercom and asked him if he'd ever
been to Texas. When Martorelli said he had not, Cardascia told him to pack
his bags, he was leaving for Texas that day. Cardascia told Martorelli he would
be representing Flushing Federal in a big deal.

It was Monday, December 4, and within an hour Flushing had cut Bill
Smith a $700,000 check off a commercial line of credit. Rapp, Smith, and
Rapp's attorney left to make the travel arrangements and said they'd return in
an hour to pick up Martorelli. After they left Cardascia told Martorelli that the
group was going to buy the First Bank & Trust Company in Duncan, Oklahoma,
140 luiles north of Dallas. Once the bank deal was closed, Rapp would give
Martorelli a check from the Duncan bank to pay off all the loans he and his
friends had taken out of Flushing. Martorelli had two jobs on the trip: first, keep
a close eye on the $700,000 check, and second, bring back the check paying
off the Flushing loans.'

Within two hours Martorelli was on a plane to Dallas, carrying the $700,000
check Flushing had cut for Smith. That night they all stayed in a Dallas hotel
and the next morning Rapp chartered two planes at a nearby airport and flew
his entourage, including Martorelli, to Duncan, Oklahoma, "to check out the
bank." A little tire kicking, as it were. Rapp told Martorelli, "We're going to
meet the bank's president, the directors, and a couple of shareholders." Which
Martorelli later said seemed reasonable enough to him. After all, he didn't expect
Rapp to buy a pig in a poke. That afternoon Rapp and his entourage arrived at
the Duncan bank. More meetings, dinner, and more meetings, but no deal.
Martorelli waited outside while Rapp et al huddled with the bank officials. At
one point during the negotiations Rapp came out of the meeting and asked
Martorelli for the $700,000 check.

"They want to see it. It's the earnest money in the deal," Rapp told him.
Ron handed over the check. Later that evening, after the meeting ended, Rapp
gave the check back to Martorelli. Still no deal.

That night they flew back to Dallas, and Martorelli called Cardascia to
inform him of the progress.

Flushing Gets a Bum Rapp '145

"Nothing so far," Martorelli said.

The next morning Rapp met MartorelH back at the Dallas hotel for breakfast.
Martorelli asked him how the deal was going. "We're still trying to iron out
some details. But it looks good though," Rapp said. "It should happen shortly."
Rapp then asked Martorelli for the $700,000 check again. Martorelli handed
the check over. It was Wednesday. Martorelli called Cardascia.

"Is the deal going to happen or not?" his boss asked.

"I don't know."

"Okay, if nothing happens by tonight, come back to New York.'.'

"Okay."

The next morning Martorelli was on a plane back to New York. No deal
and no check. The $700,000 was firmly in Rapp's hands.

Martorelli said Cardascia told him not to worry about the money. Cardascia
said Rapp's purchase of the Duncan Bank was imminent and the deal was just
awaiting approval of the Federal Reserve, the regulatory agency that had oversight
responsibility for the First Bank & Trust Company of Duncan.'' It seemed to
Cardascia that the Duncan Bank acquisition was on the verge of being a done
deal. But he informed Rapp that Flushing still needed more collateral on all
the money it had lent to Rapp and his friends. The regulators were starting to
sniff around the S&L's vault. Rapp told Cardascia not to worry, he'd take care
of the situation. Rapp promised Cardascia that he would have enough deposits
placed at Flushing to offset all the lines of credit that he'd arranged since May.
Satisfied, Cardascia agreed to make more loans to Rapp and company. The
FSLIC charged that Rapp got $350,000 for another dummy company that he
had set up, Jilly's Enterprises got another $350,000 and a friend of Delvecchio's,
acting as a straw borrower for Rapp, walked in and got a $575,000 line of credit.
Authorities later alleged Rapp paid the straw borrower $5,000 and promised him
a $50,000-a-year job with Jilltone, a new company Rapp was setting up with
Jilly Rizzo and Delvecchio. (Delvecchio said Jilltone was trying to buy a hotel
and casino in Santo Domingo.)'

Rapp told Cardascia to have Martorelli pick up the collateral for all the loans
on December 17, 1984, at the Regency Hotel on Park Avenue in New York.*
The last time Rapp had promised to produce collateral for the loans he was
getting from Flushing, he had given Flushing worthless stock that he didn't own.
This time the collateral was to be $8 million in certificates of deposit that Rapp
supposedly had on deposit at Co-op Investment Bank, Ltd., an offshore bank
based in St. Vincent in the West Indies. Dollar for dollar the face value of the
CDs matched the lines of credit that Rapp and his friends had received at
Flushing. Cardascia sent Martorelli to the Regency Hotel and as Martorelli
walked into the room he looked at the familiar faces.

"You know everyone," Rapp said.

"Yes, I know everyone," Martorelli said.

146 • INSIDE JOB

Rapp read the pledge agreements that Martorelli had brought. He didn't like
some of the language in the agreements and decided to change it.

Martorelli said Rapp snapped, "I don't like this clause." The clause he
disliked \vould'\e allowed Flushing to claim the CDs as collateral prior to the
maturity date of the CDs. Martorelli didn't argue with Rapp because the CDs
were scheduled to mature before the loans came due an\-\vay. Rapp took a p)en
from Martorelli and made the change. Now Flushing couldn't claim the CDs
until they matured, which wasn't for several months. Rapp then handed the
passbooks to Martorelli. The pledges and passbooks in hand. Martorelli headed
back to Flushing, feeling that at last the bank had securit)' for all the questionable
loans Cardascia had approved for Rapp. Ever>one breathed a sigh of relief With
the old loans now supposedly secured, Cardascia approved another round of
loans totaling $1.2 million. Regulators claimed Rapp used part of the money to
keep his earlier loans current. The CDs Rapp had gi\cn Martorelli were bogus,
but it would be a while before Flushing found out. Rapp later admitted that he
had paid a $1.5 million fee to Co-op Bank and the company's president to set
up the phony CDs. Trying to cash them would be like grasping at a mirage.

By the early days of 1985 too many "interesting jjeopie" were hanging around
Flushing Federal and too much money was heading out the door. Both regulators
and the FBI were poking around asking questions. Matters got worse when a
top executive of a company that had been selling home improvement loans to
the S&L was found murdered in his car in Bayside, Queens — Mike Rapp's old
neighborhood. New York's Daily News described the murder as a mob-st>!e hit.
The FBI declined to talk to us about the case, noting that its investigation was
far from being a closed matter, but we did learn that Flushing had been losing
millions of dollars on the loans it had been buying from the dead man's company.

The FBI zeroed in on the murder case, and while Agent Michael Shea was
poring over Flushing's loan files he discovered a group of names that sounded
terribly familiar, including Rapp's. By chance the FBI had found fomier pro-
tected witness Michael Hellerman. It took only a phone call to verif>- that Michael
Rapp and Michael Hellerman were one and the same and that Hcllemian had
once been the mob's {personal stockbroker. Another agent familiar with the case
said that the lines of credit put together by Rapp "looked like a who's who of
organized crime. " The FBI also discovered the name of another convicted stock
swindler: Lionel Reifler.

In early April 1985 Cardascia was forced out of his job by the New York
FHLB. Later that month Flushing was taken over by the FSLIC. The S&'L was
in the hole by at least $50 million and would wind up costing the FSLIC close
to $100 million. Starting in April, attorney Andrew Donnellan, with the New
York law firm of Dewey, Ballantine, Bushby, Palmer &• Wood, started inves-

Flushing Gets a Bum Rapp • 147

tigating Flushing's failure for the FSLIC. Also on Rapp's trail were the FBI and
the U.S. attorney's office in Brooklyn.

While the Flushing investigation was in its early stages, Rapp was allowed
to continue to operate unimpeded, despite federal suspicions. We had seen this
happen hefore: FBI agents in one city focusing only on what a suspect did in
that jurisdiction and never checking to see if that person was operating (or had
operated already) somewhere else. Rapp had similar scams in progress at thrifts
and banks in California and Florida, so when Flushing collapsed he just shifted
his attention to other fronts. But his relationship with his associates was becoming
strained. He argued with Reifler and threw him out of his house. When the
Texas businessman who had loaned Rapp the worthless stock was questioned by
the FBI, he became furious with Rapp for getting him involved. Later he testified
that Rapp threatened to have him killed if he didn't shut up."* Law-enforcement
officials said Rizzo's deal to buy People's National Bank of Rockland fell through
because the Federal Reserve wouldn't approve it, and Delvecchio said he and
Rizzo, sensing trouble, started avoiding Rapp.

Later Delvecchio told investigators that Rapp essentially "robbed the
bank," that he "finagled the bank out of money with other people involved."
Delvecchio said he was mad at Rapp for the way he was wasting money
when he was supposed to be investing it for the gang. Delvecchio brought his
personal phone books to a deposition, apparently as a reference tool. Donnellan
threatened to have Delvecchio's phone books entered as evidence in the case,
and he grilled Delvecchio on whose names and numbers were in the book.
Among them were all of the players involved with the Flushing lines of credit,
including Rapp and Delvecchio's good friend Jilly Rizzo. Delvecchio had
many different phone numbers for Rizzo, one of which was a New York phone
number.

"Rizzo has a New York phone number?" Donnellan asked. Rizzo's residence
had been listed as Rancho Mirage, California.

"Yes, he does, " said Delvecchio. "Write that number down and call it up.
Find out who answers."

"What is it?" asked Donnellan.

"Frank Sinatra's number," said Delvecchio. Donnellan let the matter drop.
A couple of minutes later Donnellan took the book and found the name of John
Wayne.

"You have John Wayne's number in here?" asked Donnellan.

"Yeah," said Delvecchio. "You want to talk to him? You'll have to get a
shovel."

None of this slowed Rapp down. He was used to making and losing friends,
and he was already building bridges to new ones. In 1985 a mutual friend, a

148 ■ INSIDE )OB

banker in Houston, suggested to Rapp that he contact Charles Bazarian in
Oklahoma Cit\'. Cliarhe had plcnt>' of money, he said, and might be willing to
loan to Rapp. Rapp liked the idea and in October he and William Smith flew
to Oklahoma for a meeting with "Fuzzy." Mario Rcnda, who had gotten to
know Bazarian at Con.solidated Savings, had flown out from New York to attend
one of Charlie's famous Halloween parties and was already at the Bazarian
mansion when Rapp arrised.

The meeting between Bazarian, Renda, and Rapp came at a critical time
for Renda and Rapp. Renda's indiscretions with Winkler at Indian Springs State
Bank and Coronado Savings had led to the FBI raid on First United Fund
headquarters a year earlier. Since then investigators had been all over him. He'd
gotten bad press and cash flow was a real problem. Rapp was having similar
troubles. His old friends didn't trust him anymore and he was having a hard
time finding financial institutions that would take his bait. Bazarian, on the
other hand, was still riding high. He was plugged right into a number of financial '
institutions, and his company, C.B. Financial, could still swing millions in
loans anytime he wanted.

All the ingredients Rapp required to solve his current problems were present
at that meeting. He had a scam in mind, but he couldn't pull it off alone. He
needed help. Above all else he needed $10 million in seed money to prime the
pump. Rapp laid out the deal for the other two men:

There was this bank in Florida, the Florida Center Bank in Orlando, he
said. Its directors were anxious to sell out, if they could make a killing on their
stock, and they were willing to work with him on a deal that could leave Rapp
with the bank in his hands. To pull it off he needed just $10 million for two
or three days. Five million would be used to buy a CD at Florida Center Bank,
for which the bank agreed to pay him $3. 1 million interest in advance (ten years'
worth of interest in advance). In addition the bank would loan him $3.8 million
(using the same $5 million CD as collateral). Then he'd combine the $3.1
million and the $3.8 million and buy a $6.9 million CD, on which the bank
would pay him ten years of up-front interest and on which they'd grant him
another, even larger loan. He would repeat the process three times, in about
that many days, and it would generate enough money to repay Bazarian his $10
million plus $300,000 for his trouble.

The other $5 million that Bazarian loaned him, Rapp said, he'd use to buy
controlling interest in the bank. And once Rapp controlled Florida Center Bank,
he'd be in a position to make loans to Bazarian, esf)ecially if Rcnda funneled
deposits into Florida Center Bank so it had plenty of cash. Rapp said he wanted
to start a pay telephone business with loans from Florida Center Bank.

Charlie didn't have $10 million in cash right then, but he had a checkbook
and an idea. He agreed to give Rapp two checks for $5 million each, but he
didn't trust Rapp and asked his house guest and friend, Mario Renda, to ac-

Flushing Gets a Bum Rapp '149

company Rapp and tlic hvo $5 million checks to Florida. Bazarian offered to
pay Renda $150,000, and Renda agreed to go.'" Getting involved in the deal
was a foolish move on Renda's part. He knew federal prosecutors were in pos-
session of all his First United Fund records and those of his chief accomplice,
Franklin Winkler. They would be watching his every move. But apparently he
just couldn't refuse the $150,000 — or the promise of a new scam.

With Ba/.arian's $10 million, Rapp finally had his best crack yet at getting
his own bank. He flipped the CDs up to $10 million as planned, Bazarian's two
$5 million rubber checks were covered before they could bounce, Renda started
brokering deposits into Florida Center Bank, and Rapp started making sweetheart
loans out the front door.

One successful deal under way, Rapp and Bazarian began looking for other
business opportunities. Bazarian owned 9.9 percent of Local Federal Savings
and Loan in Oklahoma, and he decided he wanted to sell his stock to Rapp and
Rizzo. He set up a dinner meeting at Pier 66 in Tampa between Rapp, Rizzo,
a stockbroker named Marc Perkins, his boss, and others. The purpose of the
meeting, according to Perkins, was to discuss the sale of Bazarian's Local Federal
stock. Perkins, referred by an acquaintance of Bazarian's, had never met any of
the group. When he arrived at the restaurant Bazarian introduced him to the
others. During cocktails Perkins listened as the men talked, then he excused
himself. In the restaurant lobby he ran into his boss, who had earlier left the
table, and he remarked to him, "You wouldn't believe the bullshit these guys
are talking. I don't think these guys have enough money to pay for cocktails,
much less an S&L."

The group settled in for dinner. The waiter brought the soup. Perkins made
small talk with Rapp about their mutual interest, stocks. Suddenly, Perkins later
told us, one of the men leaned across the table and nonchalantly asked Rizzo,
"Hey, Jilly, you ain't packing a piece tonight, are you?"

Rizzo didn't respond and just looked the other way, as if to say "How
indiscreet." Perkins almost choked on his soup. After composing himself, he
left the table and phoned his wife.

"Honey, you have to call me back in a little while and have me paged. Say
there's a family emergency or something. I have to get out of here. You wouldn't
believe what's happening."

When he returned to the table the men were discussing Rapp's and Rizzo's
proposed buyout of Bazarian's Local Federal stock. Rapp told Perkins about his
prior conviction. Perkins told Rapp that a felony conviction precluded Rapp
from participating in any such stock transfer and that he, Perkins, wanted no
part of any of this business. Perkins liked his name and didn't want to have to
change it.

"They were going to buy the Local Federal stock using Local's own money,"
Perkins said later. Just like the Florida Center Bank bust-out.

150 ■ INSIDE JOB

In June 1985 the FSLIC. on behalf of Flushing, sued Rapp, Cardascia,
Formato, Rizzo, Delvecchio, Beveridge, Smith, the companies they controlled,
and others. The FSLIC charged that Cardascia was "corrupted" by Rapp and
his associates and that he aided and abetted in a scheme to defraud the S&rL
via 22 lines of credit, all of which went into default. The FSLIC charged that
Cardascia didn't have the authority to grant the sizable lines of credit. (Several
months later Cardascia was dropped from this RICO suit and named prominently
as a defendant in a separate suit against just Flushing's former officers and
directors, mainly Cardascia and Martorelli.)

A judge promptly imposed a $7,000-a-month spending limit on Rapp, but
in February 1986 U.S. marshals in Miami arrested Rapp for exceeding those
limits. According to court records, he had spent $44,000 in one month. The
judge charged him with criminal contempt of court.

By the spring of 1986 the Justice Department had a better picture of Rapp's
activities and knew he had to be shut down. One New York law-enforcement
official familiar with the case put it this way:

"We knew what Rapp was up to but there was no program to nail him. He
was running around bilking banks and thrifts and he had to be stopped. So we
had a meeting down in Tampa. I said, 'This is what he's done and this is how
he did it. I have an agent in Oklahoma who knows what he did there.' No one
in the Tampa department could get up to sf>eed on this. It was taking too long.
So we cooperated — New York, Oklahoma, and Tampa — and we put a case
together in six months. "

A whistle-blower at Florida Center Bank helped bring Rapp's scam there to
a screeching halt, but only after Rapp had withdrawn about $12 million to $15
million of a $30 million loan commitment the bank had made to him." The
three bustkateers, Renda, Rapp, and Bazarian, were indicted in September 1986
and charged with defrauding Florida Center Bank. Assistant U.S. Attorney Ste-
phen Calvacca prosecuted the case and he said it was one of his most memorable
trials.

He told us that he was about to present a key point to the jury when he
suddenly noticed the jury's attention was focused out in the gallery. He turned
to discover, to his amazement, that former heaxyweight champion Muhammad
Ali had strolled into the courtroom. CaKacca said Ali attended several sessions
of the trial (as did former Gemini and Apollo astronaut Tom Stafford — the Tulsa
Tribune reported that Stafford and Ali had both been involved in business deals
with Bazarian) and always caused a stir. Calvacca knew the defendants had
arranged this tactic, and he hit upon an idea to turn it around. When Calvacca
began his closing remarks to the jury, he told them he knew they were wondering
why Ali had been in the courtroom.

Flushing Gets a Bum Rapp • 151

"I told tlicni that Aii had long been an admirer of my courtroom style and
often attended my trials."'- Caivacea said the consternation at the defense table
was extreme, but they had already had their last say in the case and they had
no choice but to swallow hard and accept the fact that their little plan had
backfired on them."

Annoying the prosecution was something the three bad-boy defendants
seemed to relish. F.very day at noon the court broke for lunch, and defendants
and prosecutors alike retired for their noon meal. But as prosecutors munched
on their Wendy's hamburgers, Rapp, Renda, and Bazarian sat at a table covered
with a white linen tablecloth while houseboys served them fresh gourmet deli-
catessen food flown in that morning from New York: pate, luncheon meats,
even fresh cheesecake from Leo Lindy's on Broadway.

"Hey, Caivacea, ya oughta try some of this cheesecake, it's really goooood,"
Rapp would taunt.

In their closing remarks defense attorneys tried to convince the jury that
their clients were simply misunderstood entrepreneurs, that stodgy regulators
just didn't understand their revolutionary and innovative business deals. They
even compared the three with the Wright brothers.

Caivacea retorted, "The Wright brothers? These were the Wrong brothers,
the Blues brothers, the We-Take-the-Money-You-Lose brothers."

Rapp was found guilty of bank fraud in the case and sentenced to 32 years
in federal prison and fined $1.75 million. Bazarian was found guilty of three
counts of bank fraud and sentenced to two years in prison and fined $100,000.
Renda was found guilty of one count of conspiracy and sentenced to two years
in prison and fined $100,000.'^

As the investigation into Rapp's role in the downfall of Flushing Federal
and other financial institutions continued, Rapp's troubles mounted. Not only
was he convicted and sentenced to 32 years in prison for the Florida Center
Bank seam but he pled guilty to conspiracy and fraud charges in connection
with the Flushing loans as well. He was sentenced to 10 years in prison for the
Flushing bust-out, but his term was to run concurrently with the Florida Center
Bank sentence.

When investigators began to learn the true extent of Rapp's activities, they
opened investigations in New York, Los Angeles, Denver, Miami, and Orlando.
Rapp had kited checks at Sun Bank of Miami (perhaps to the tune of $1 million
in losses, some said) in 1984. " Similar troubles were also reported by the president
of Western United National Bank in Los Angeles. When SSDF Federal Credit
Union near Tampa collapsed in May 1986, regulators discovered it had made
a large loan to a company allegedly controlled by Rapp because he promised to
bring in millions of dollars in brokered deposits. Then, comparing notes with
others, regulators learned that Rapp and his friends had tried unsuccessfully to
buy several thrifts and banks in Oklahoma and Tennessee. The picture that

152 ■ INSIDE JOB

emerged was one of Rapp and a band of associates clearly running a two-year
looting operation while trying everything within their power to get control of a
financial institution themselves.

Plarly in 1987 Lorenzo Formato, who served as president of World Wide
Ventures, was sentenced to six years in prison for stock fraud in an unrelated
case brought against him in New Jersey. However, while being sentenced in the
New Jersey case, Formato cut a deal with the U.S. attorney's office in Brooklyn
and pled guilty to mail fraud charges stemming from the use of World Wide
stock as collateral to obtain loans from Flushing. Regulators claimed the World
Wide stock was worthless. Formato agreed to cooperate in connection with the
Flushing case.

Also indicted, and later convicted, were Harold Farrell and Robert Wolk.
who'd been charged with defrauding Flushing out of $1 million. '" The assistant
U.S. attorney handling the Farreil-Wolk case would later recall how Farrell
constantly begged him not to indict: "He came to my office telling me how he
had heart problems and how prison would kill him," he said. Wolk and Farrell
were both in their early sixties. 'I didn't believe him," he said with a tinge of
comic irony in his voice. "He'd been doing the same thing for years with other
prosecutors. The other prosecutors listened. I didn't. I indicted him and he was
convicted. A couple of months later he actually did die of a heart attack."

Regulators sued Rizzo in both the Flushing and Aurora Bank cases. Ken
Merica, a private investigator in the Aurora case, recalled in 1988 that when
Rizzo was subpoenaed he ran out the back door of his house in Rancho Mirage
to avoid being served.

"You know where he went?" recalled Merica. "He ran over to Sinatra's
house. He spent the afternoon over there. He thought we'd go away. Well, we
waited. He came back four hours later and he didn't see us. We served him
while he was walking up his driveway."

Cardascia was indicted in October 1988 for extortion and misapplication of
funds in connection w itli a $240, 500 loan he allegedly had Flushing Federal make
to Donald Luna, a convicted swindler from Nashville, Tennessee. The case came
to trial in early 1989, and after hearing all tlie evidence, the federal judge said
Cardascia was clearly "a man t)f bad judgment " who probably should have been
fired, but he found Cardascia not guilty of defrauding Flushing Federal in tlie Luna
matter. Instead, the judge excoriated the Reagan administration, the FHLBB, and
Congress for pemiitting the tlirift's failure by their negligence. A disappointed
prosecutor said the grand jury investigation of Flushing Federal would continue,
and in 1989 Cardascia, Delvecchio, Martorelli, Rizzo, and others were indicted
in connection with Flushing loans to World Wide Ventures Corporation, Rapp,
and others. Cardascia was accused of receiving kickbacks, in the fomi of World
Wide stock, in return for having Flushing make a $5 million loan commitment to
World Wide. Delvecchio was charged with participating in the deliver*' of tlie stock

Flushing Gets a Bum Rapp '153

to Cardascia, and Martorelli was accused of falsifying a document in relation to
the World Wide loans. Cardascia was also charged with illegally making loans to
Rapp and his associates in exchange for brokered deixisits from Owen Beveridge
and First United Fund. (At the time, regulators had forbidden Flushing to take any
new brokered deposits.) Delvecchio and Rizzo were charged with using fraudulently
overvalued security (the Co-op Investment Bank CDs and the Poconos property)
as collateral for loans.

Rizzo's attorney said, "If it were not for his relationship with Mr. Sinatra,
there would be no indictment. Mr. Rizzo is an honorable man."

In announcing the indictments the U.S. attorney said, "It would appear
from the allegations in this indictment and earlier depositions of other borrowers
that Hushing Federal was being run like a candy store."

Investigators were said to be looking into 80 questionable loan transactions
at Flushing. An assistant U.S. attorney handling the case didn't want to talk
about it, but she said she'd be using Rapp as a witness against his old buddies.
Those sued civilly, but not charged criminally, denied wrongdoing in the case.
Most of those charged criminally refused to talk. The case was pending as of
this writing.

As for Mike Rapp, we never expected to hear from him. But in September
1988 Rapp called us collect from his jail cell in the North Dade Correctional
Center in Miami in response to a letter we'd sent him asking about the Flushing
Federal case. The first thing he wanted to know was how we found out where
he was doing time.

"A law-enforcement official told us," Paul Muolo replied.

"No one's supposed to know where I am," he said. Rapp sounded concerned.
"What's your book about?"

"The bust-out of S&Ls."

"Yeah, what's your angle?"

"Our angle is that the mob and others are busting out thrifts and banks.
What do you think?"

"Yeah, that's partially true," he said, and then he paused. Rapp said he
hoped we weren't going to sensationalize his role in financial failures. He rambled
on about how "there was nothing illegal in my deal" — a reference to the Florida
Center Bank case — and how he never told a lie on the witness stand. "Lending
money to your friends shouldn't constitute fraud, " he complained.

"Really?"

"I can't talk about any of this, not yet," he said. "I'm appealing my case. I
may write another book of my own. I've had a couple of offers." Rapp said the
real "story" behind the S&L debacle "is the regulators." He said they were, and
are, "incompetent," but he declined to elaborate.

Paul told Rapp that we had a host of questions we wanted to ask and that
we would send him a letter outlining our areas of interest.

154 • INSIDE JOB

We sent him a list of very frank questions about the Florida Center scam
and waited. Two weeks passed and not a word from Rapp so Paul decided to
call. Rapp was angr\'.

"Yeah, I got your letter and 1 don't like your questions. When are you going
to start being a reporter and stop being a prosecutor? Don't bother me anymore.
My lawyer is sending you a letter." Paul told him we'd add it to our growing
collection. Rapp hung up. The lawyer letter never arrived.

Later, Tony Delvecchio told us that he did not participate in any of Rapp's
swindles, but he did admit that "a lot of innocent people got hurt. Prominent
people were swindled." He said Rapp and Napoli knew each other well in Florida
and added, "One of these days I'll tell all about Rapp and World Wide Ven-
tures. . . . Yeah, now the feds are talking to Napoli, trying to find out who all
the top gears are." He said, "Rapp's money is in offshore banks. If he's smart
enough to con all these people, he's smart enough to have offshore accounts."

Then Delvecchio hit the point that had been bothering us. "It's amazing.
Rapp did all these scams 20 years ago and then he writes a book and does it all
over again. He was good, Rapp was. He convinced a lot of people. "

The beauty of the Rapp operation, from our point of view, was that it was
so typical of a wise guy in action. Rapp loved to spend his days figuring out
schemes. A brilliant man, he could have been successful as a legitimate busi-
nessman, but the excitement of swindles held too powerful an allure for him.
From the day thrifts were deregulated, it was inevitable that Rapp would loot
them. Opportunities of that magnitude could not possibly go unnoticed by
swindlers like Rapp. But the unanswered question in the Rapp stor\' (and in
many of the other cases in this book) was — where did the money go? Delvecchio
said in depositions that Rapp spent $500,000 on jewelry for a girlfriend and
$500,000 in Las Vegas, which still left a large amount unaccounted for, since
in a couple of years he got over $20 million from thrifts and banks.

One answer to that question finally came to us from a law-enforcement
official who told us that hvo New York crime families, the Lucchese and Gen-
ovese families, were making demands on part of the take. When a dispute broke
out over how the money was going to be di\ided up, the matter was finally
.settled, the official told us, when a friend of Rapp's, an officer in one of the
families, organized a sit-down at which the families decided how the shell
corporations would split up the loan proceeds. How much was divided up?
Rapp's not saying.

Finding Rapp doing business with Renda and Bazarian was a real surprise.
When Paul first got the tip to check out Flushing Federal, we did not know of
any connection at all between the three men. But there they were, on Halloween
1985, at Bazarian's Oklahoma Citv' mansion, planning a scam. It was a graphic

Flushing Gets a Bum Rapp • 1 55

illustration to us of the way the network of swindlers worked. They heard about
each other by word of mouth. Some were Mafia members and associates; some
weren't. But they all did business together, and the distinction between organized
crime and mere white-collar crime blurred until it became almost meaningless.
The looting of the savings and loan industry was carried out by a band of swindlers
who operated, and cooperated, in their own best interests. We kept a list of the
people we found looting each savings and loan we investigated. Bazarian would
one day taunt us by bragging that he knew everyone on our list.

CHAPTER FOURTEEN

Casino Federal

In the movie Quest for Fire a band of Stone Age men, consumed with the need
to acquire a cinder from which they could kindle their fires and reap the huge
benefits fire could bring, scoured the countr>side. To get a cinder they would
steal and even kill. The quest became an obsession. When we investigated a
close relationship that we discovered between savings and loans and gambling
casinos, we learned that certain segments of the business community pursued
casino ownership with the same passion that cave men searched for fire. They
flocked to areas where it was rumored the public was about to appro\e gambling.
They used every tool at their disposal, primarily political and financial, to in-
gratiate themselves with the local power brokers.

Because of the skimming and money-laundering opportunities inherent in
a business that dealt in such a high volume of cash, no one was more dogged
than the underworld in the pursuit of casinos. Owning a casino was a wise guy's
most cherished dream. The projjensity of organized crime to circle the casino
flame had a dual result: Rumors of mob affiliation followed \irtually e\cryonc
who applied for a casino license, and the gaming control boards that granted
casino licenses developed a tough licensing procedure designed to weed out
crooks. Nevada and New Jersey licensed casinos as a means of raising revenue
and as a way of controlling casino ownership. .^Kpplicants underwent a rigorous
investigation and interrogation during which Gaming Control Board investigators
looked for any possible connection bch\cen the applicant and organized crime.
If even a casual relationship could be established, the license was generally
denied, hi perhaps the ultimate irony, after thrift deregulation it was much easier
to own a thrift than it was to own a casino.

To circumvent the licensing obstacle, men with organized crime connections
often used "beards, " indi\iduals with clean records who could hold the casino
license for them. In return a beard was generally rewarded with a piece of the

156

Casino Federal • 157

action cither at the casino or in some other business enterprise. The gaming
control boards routinely uncovered beards and denied them licenses or, if they
had already slipped by, threw them out. But other beards would replace them
in short order, all part of the continuing quest for fire. Sitting on a gaming
control board was like being a pest-control expert, .some said. They sprayed
regularly but the roaches always returned.

Conservative financial institutions shied away from making loans on an
enterprise with such a colorful hi.story. For this reason casinos were often financed
bv pension funds' or other large pools of money- that did not have to operate
under the strict standards that regulators demanded of thrifts and banks. But
then came the deregulation of the thrift industry and, with it. new owners and
managers who were only too happy to make loans on casinos. The timing of
thrift deregulation was serendipitous for those who aspired to own a casino
because it came just as financing by the pension funds was being closed to them
bv fierce government antiracketeering prosecutions and seizures. Those who
pursued casino ownership with a lifetime passion promptly saw the opportunities
inherent in thrift deregulation. Time and time again, as we researched this book,
we ran into the casino connection — thrift executives loaning on and investing
in casinos.

We first encountered the casino connection when we met Norman B. Jensen
at Centennial Savings. Jenson was a Las Vegas attorney with a 20-year history
in Las Vegas gaming, including, at various times, connections with the Crystal
Bay Club Cal-Neva in North Lake Tahoe and the Thunderbird Hotel, the
International Hotel (now the Las Vegas Hilton), and the Royal Inn Hotel, all
in Las Vegas. His "claim to fame," he told us, was the Las Vegas Holiday
Casino, which he and partners developed, promoted, and operated. He and an
associate held a $1.7 million mortgage on the Shenandoah Casino in Las Vegas,'
and in the early 1980s ]enson was also trying to get control of two casinos in
Nevada, the DeVille and the Crystal Palace.^ We learned of Jenson's casino
involvement when coauthor Steve Pizzo spotted Jenson's name in a National
Thrift News article about a Seattle trial of executives of three thrifts that were
located in Louisiana, Texas, and Washington. Jenson, the story said, was in-
volved in a complex $4 million casino-financing agreement with the thrifts. We
wondered how Jenson got involved with three such widely separated institutions,
and he told us that a loan broker named John Lapaglia, whom he had known
for 1 5 years, had made the introductions.

When we researched Lapaglia we found that he was a former Texas vice
cop who had gone into the real estate business and at one time had maintained
an office in Las Vegas, which was where Jenson had met him. In the mid-1970s
Lapaglia owned East Texas State Bank in Beaumont, Texas, for a little over a

158 • INSIDE JOB

year. In 1984 Lapaglia would apply to own his own savings and loan, Uvalde
Savings Association, but federal regulators denied the application.

In the 1980s Lapaglia was the owner of Falcon Financial Corporation, a
mortgage brokerage firm in San Antonio.' A smooth operator, he reminded
people of an Arabian merchant. He traveled in a leased corporate plane, ac-
companied by his man Friday who doubled as a secretary. He said he did so
because traveling with a woman secretar\' could raise questions. He was rumored
to be a womanizer, ordering $100 bouquets for pretty receptionists he'd just met,
but he told us the rumors weren't true. The brokerage business had been good
to him — he claimed to have brokered $2 billion in loans, on which he earned
his company hefty commissions of between $20 and $60 million over 20 years. •"
Perhaps that was why his wife had a dollar sign painted on the bottom of their
swimming pool at his home outside San Antonio. Associates said he was a high
flier, living the good life.

Through his trade as loan broker, Lapaglia had become well acquainted
with the nation's savings and loans. He was a strong supporter of deregulation
— as were most loan brokers, because it increased their income potential
dramatically — and he had developed his stable of favorite institutions. He knew
which thrift executives wanted to participate in the speculative opportunities (and
risks) made possible by deregulation. In late 198^ Lapaglia" had sponsored a
seminar in Acapulco, Mexico. About 25 thrifts, those on Lapaglia's most favored
list, attended. The topic of the seminar was wheeling and dealing in a deregulated
environment and those attending were the lenders of choice for Lapaglia's bor-
rowers.

When Norm Jenson approached Lapaglia for help in getting loans for the
Crystal Palace and DeVille casinos, Lapaglia knew just who to talk to — Guy
Olano, chairman of Alliance Federal Savings and Loan in Louisiana." Lapaglia
had a close working relationship with Olano. Employees at Alliance said he
often visited Olano in New Orleans, and one of Lapaglia's former employees
worked for Olano. (Federal authorities told us Lapaglia brokered $40 million
worth of loans to Alliance, including loans to himself, his family and his own
projects, and the thrift lost several million dollars on the loans. Lapaglia denied
the charge.) Alliance Federal was in Kenner, Louisiana, 40 miles up the Mis-
sissippi River from New Orleans in the bayou country of southern Louisiana.
Guy Olano, a New Orleans attorney, was a founder of Alliance Federal and
later became chairman. He was an arrogant young man in his early thirties,
Italian, handsome, and stocky.

"He produced a physical revulsion in me," a fellow attorney told us. "He
looked like a fat Moammar Gadhafi [sic], curly black hair, dark glasses, wafer-
thin gold watch, Italian suits. He had a psycho-look in his eyes. He looked
gangsteresque."

Once Olano got control of Alliance, it didn't take him long to get in trouble.

Casino Federal '159

By August 1982, long before Lapaglia went to Olaiio on belialf of Norm Jenson,
Olano had already earned his first cease-and-desist order from the Federal Home
Loan Bank Board. Regulators' documents showed that Alliance Federal ignored
the order for two years, and finally, on June 11, 1984, the FHLBB demanded
(and got) court enforcement of the order — the first time in history that the
FHLBB had resorted to court enforcement of one of its cease-and-desist orders.
The Bank Board said it did not like Alliance's loose loan underwriting practices
or the compensation Olano and some of his fellow directors and officers were
paying themselves.

But Alliance Savings officers probably knew that short-handed regulators
were paper tigers, and Olano went right on ignoring government saber rattling.
In 1984 he tried to buy a Miami bank, and he was represented at that time by
Miami attorney Jose Louis Castro. A New Orleans attorney described Castro as
a "great dresser" who was "breathtakingly handsome. " Castro was frequently in
and out of Olano's office in New Orleans, an FSLIC attorney told us, and Olano
visited him regularly in Miami. In addition. Alliance made several loans to
Castro. Later, FBI agents testified in court that Castro had close ties with the
Colombian Duque and Aroseo organized crime families, which had been con-
nected to money-laundering schemes at American financial institutions. They
said Olano may have tried to set up bank accounts in the Netherlands West
Antilles so he could use the account as a depository for money in the event he
needed to flee the country. (Castro was later sentenced to ten years in prison for
bank fraud in a case unrelated to Alliance. )

John Lapaglia told us that when he went to Alliance Federal to get a loan
for Norm Jenson, he was only looking for interim financing (Home Savings in
Seattle had agreed to assume the loan after one year), and Olano said he would
be happy to arrange a one-year, $4 million loan.' The agreement was finalized
during a meeting June 15, 1984, in a private suite at the Sands Hotel in Las
Vegas. Among those at the meeting were John Lapaglia, Norm Jenson, and
Guy Olano.

"We went up to Lapaglia's suite at the Sands, " Jenson said. "We sat down
and at the time they had loan forms with them, and I think somebody either
had a secretary with them or someone from the hotel — I can't remember — but
they had a typewriter they had gotten, and they actually executed final loan
documents. . . ."'"

The meeting at the Sands Hotel appeared to be a lucrative one for everyone
involved. Initially Jenson received $500,000 as the first installment of the $4
million from Alliance. He promptly sent $50,000 to Olano for "legal fees."
Regulators later called the $50,000 a kickback. (It was not illegal at that time
for Jenson to pay a kickback, but it was illegal for Olano, an official of a federally
insured thrift, to receive one. It later became illegal to receive or pay a bribe to
a thrift or bank official.)

160 ■ INSIDE JOB

Within six months of the meeting at the Sands, AlHance Federal had released
to Jensen $3.2 million of the promised $4 million for the DeVille Casino. The
last in.stallment the thrift paid, just before Alliance was seized by federal regu-
lators, gave us a rare glimpse into just how loan money was often divided up
among the players. Jenson signed for a $900,000 installment but claimed he
saw only $22,000 of it. Apparently it was payday on this deal and others were
in line ahead of Jenson. Jenson later testified that Lapaglia received $250,000
as his fee for referring Jenson to Alliance and took another $142,000 to pay off
a loan he had at Alliance. In Jenson's words, the $142,000 was "scraped off the
deal" by Lapaglia. Lapaglia told us the $250,000 and the $142,000 were his
commissions for the DeVille and Cr\stal Palace deals. He said Olano took the
$142,000 for Alliance out of Jenson's loan without Lapaglia's knowledge.

Asked by FSLIC attorneys why he would sign for $900,000 while getting
only $22,000, Jenson responded, in essence, that you had to be there.

"You know, it's hard to put yourself in somebody's sp)ot at the time," Jenson
responded, "it's almost incomprehensible if you weren't there."

What did he think happened to the rest t'^he money?

"They just divvied up the fees and just cut it up. That's what they did.'
Jen.son was referring to the principal players in the deal: the chairmen of the
two lending institutions (Raymond Gray at Home Savings, Seattle, and Guy
Olano at Alliance Federal, New Orleans) and the man who arranged the loan,
loan broker John Lapaglia.

Alliance Federal didn't cough up the final $800,000 installment on the $4
million loan to Jenson because federal regulators stopped the deal. As soon as
he saw he wasn't going to get the rest of the loan money, Jenson threw the
DeVille project into bankruptcy. He never told how much of the $3.2 million
that he did get was "divvied up " in his name. Alliance Federal Savings collapsed
in 1985 with a negative net worth of over $150 million. Norm Jenson and
Lapaglia testified against Olano in a bank fraud trial in Seattle in 1987 and
eventually Olano got 1 5-year and 8-year sentences in federal prison, two of the
few tough sentences we were to see during our investigation." In June 1989 a
federal judge awarded the FHLBB an $86 million judgment against Olano and
four other associates of the thrift.

An attorney for one of the defendants in the Seattle ttial described Lapaglia
as "an unctuous witness who professed to be a born-again Christian." During
his testimony Lapaglia lectured the jury on his deep personal code of ethics, but
jurors weren't impressed. "The jurors didn't like him," one defense attorney
recalled, adding that even the U.S. attorney who had called Lapaglia as a witness
felt compelled to tell the jury they did not have to believe anything Lapaglia
said unless it was corroborated by other testimony. In the Seattle trial five
executives of Home Savings near Seattle, Irving Savings near Dallas, and Alliance
Savings near New Orleans were convicted of bank fraud for creating a complex

Casino Federal '161

daisy chain in which officials of the three thrifts made illegal loans to each other.
Loan brokers had made all the introductions. All three thrifts had, at one point
or another, been involved with Norm Jenson's DeVille Casino loan.

One day in the fall of 1985 a mortgage trader walked into the New York
office of the National Thrift News and told coauthor Paul Muolo that millions
of dollars had disappeared from a company he worked for. That tip led us to
investigate Philip Schwab, who owned Cuyahoga Wrecking Company, based
in Great Neck, Long Island. In 1986 Cuyahoga was the largest demolition firm
in the United States, with offices in 18 cities from Florida to New York to
Michigan. Schwab also had a stake in about 40 other development, wrecking,
and demolition companies and had business connections in every major city in
the Midwest and on the East Coast. He and his wife, Mary, divided their time
between a waterfront Mediterranean-style villa near West Palm Beach, F"lorida,
and a sprawling home in posh Pelham, New York.

Schwab had been in trouble with authorities for years. In 1963 a Buffalo,
New York, grand jury had indicted Schwab on three counts of perjury and two
counts of grand larceny. Two of the trials ended in hung juries, and most of
the charges were eventually dropped. (Schwab was acquitted ten years later of
the remaining perjury charge when the witness could not testify— he was
dead — and the key piece of evidence, a check, purportedly disappeared from
the district attorney's files on the day of the trial.)

In 1965 the IRS filed tax liens totaling $128,000 against Schwab's company
for failure to pay payroll taxes and seized the company's equipment and records.
A few months later Schwab filed for bankruptcy. When his company didn't
fulfill its contracts, the insurance company that had bonded Schwab took him
to court. In court the insurance company demanded to see company records.
Schwab refused to produce them. The judge cited Schwab for civil contempt
and ordered him to spend 30 days in the Erie County Jail.

In 1966 Schwab's mother, who was home recovering from dental surgery,
was tied up and gagged by a man dressed like a priest while thugs ransacked her
modest Buffalo, New York, home. No money was taken, and police later spec-
ulated that the intruders were mob wise guys searching for files on Schwab's
business.

Schwab's style was to keep his mouth shut when things began to go wrong.
He consistently refused to talk to reporters and often refused to talk to authorities
too. He was a tough, self-made man who had made his fortune armed with
only a high school diploma. He looked like a cross between actors Gene Hackman
and Ed Asner. A Catholic, he and his wife, Mary, were married in 1949 when
she was 18 and had raised 14 children together.

Mary was his partner in all his businesses, and she filed for bankruptcy in

162 • INSIDE JOB

1969 when one of their businesses defaulted on $25 million in contracts after
it was seized by the IRS. In her bankruptcy filing she listed assets of $3,500 and
debts of $8.2 million. Although documents showed she was Philip's partner in
the company, she claimed to know nothing about it. In court she testified that
when she asked Philip for details about the family's business finances, "He sang
to me a medley of .songs."

"What did he sing?" U.S. Attorney Kenneth Schroeder, Jr., asked. " 'Im-
possible Dream'?"

"No," she replied. "He sang 'Raindrops Keep Falling on My Head,' 'I Can't
Give You Anything but Love,' and "I'ou're My Everything,' and he told me to
mind my own business." She added, "1 don't know anything about any records.
I only know that I sign papers. " Schwab took the stand and confirmed he had
sung to his wife but he declined to answer other questions. Consistent in his
determination to keep his affairs private, he reportedly took the fifth amendment
1 56 times.

Despite his past financial (and legal) troubles, by the early 1980s Schwab
had rebuilt his empire, and thrift and bank officials were falling all over them-
selves to make loans to him. Cuyahoga was by then touting a net worth of about
$70 to $80 million. How could a banker say no?'- Schwab's companies demanded
such a healthy cash flow that he incessantly scoured financial institutions for
cash, and finally he decided it would be useful to own a casino, the ultimate
cash-flow machine. In 1984 he acquired the Mapes Money Tree in Reno for
about $6.75 million. He renamed the casino Players Casino, and then he showed
up at Eureka Federal Savings, near San Francisco, seeking financing to renovate
his new gaming house.

How, we wondered, had a New Yorker made connections with a savings
and loan near San Francisco? An attorney for Eureka Federal gave us the
surprising answer — loan broker John Lapaglia, again. Schwab had hired Lapaglia
to shop for a loan for him, and Lapaglia took him to Kenneth Kidwell, who
was president of Eureka Federal Savings. '' Kidwell was the son of Eureka Federal
Savings' founder, and he had succeeded to power at the thrift just as deregulation
changed all the rules that his dad had depended upon to build Eureka Federal
Savings into a respected San Francisco Bay Area institution. Associates said
Kidwell was cut from a very different cloth than his father. He was flamboyant
and reckless, and he reveled in the Nevada casino scene. During the time Kidwell
was head of Eureka Savings he was involved in a number of bizarre events that
were widely publicized in California. One night police stopped his car after it
was spotted weaving down the road. Officers suspected that Kidwell was drunk.
When they searched him they found he was carrying hvo loaded pistols, a . 38-
caliber strapped to his leg and a .357 magnum. The guns were loaded with
illegal, armor-piercing, Teflon-coated bullets. (The bullets had recently been
outlawed because they could penetrate bulletproof vests worn by police. )

Casino Federal ■ 163

Kidwell lined up on the side of law and order when he provided the services
of Eureka Federal to the FBI on at least two occasions. In 1981 he let the FBI
and the DEA use Eureka Federal as a cover for a drug sting operation. He
"hired" the agents and even let them rent a company car, a Mercedes 600. The
FBI brought more than $3 million in cash into Eureka's vault as part of the
sting, which did net a drug kingpin, Kidwell later told us. On another occasion,
in 1982, Kidwell provided agents with covers as part of their sting operation to
trap car manufacturer John DeLorean, whom they believed was dealing drugs
(he was later tried and found not guilty). Kidwell let the feds wire and put video
equipment in his 1,200-square-foot office, which adjoined a 3,000-square-foot
suite in Eureka Federal Savings' main office building. The suite had a living
room with two fireplaces, a bedroom with a huge round bed, a bar, and a wine
cellar.

Kidwell got close to another FBI informant, Teamster union boss Jackie
Presser, when Kidwell was contacted by a union official who said maybe "some
lending activity" could take place through Teamster pension funds. Kidwell
wrote to his lawyers in 1984 recalling the moment:

"I have been trying to do business with the Teamster pension fund for a lot
of years. If I could obtain them as a client, surely every pension fund in the
U.S. would want to do business with me." (One Teamster deal with Eureka
Federal Savings, Kidwell said in his letter, would be brokered by Abe "the
Trigger" Chapman, who has been widely alleged to be a former member of the
infamous Chicago Murder Inc. gang.) When news accounts referred to Chap-
man's alleged mob connections, Kidwell dropped the deal. Eureka Federal em-
ployees told us Kidwell developed a social relationship with Presser.

Casino loans became a Kidwell specialty. Most lenders wouldn't go near
them, but Eureka Federal made at least four major casino loans. '■* Regulators
said Schwab received a $7. 5 million loan from Eureka Federal and paid John
Lapaglia a $30,000 finder's fee. Schwab also paid Lapaglia $630,000, which
Schwab claimed was a commission for another loan but which looked to gaming
board officials like part of the casino loan. If almost 10 percent of the Eureka
Federal Savings loan ($660,000 out of a $7. 5 million loan) went to Lapaglia for
a finder's fee, gaming board officials later complained, it was an "inordinate
amount."

But a little matter still needed to be cleared up before Schwab could
pluck fruit from his new money tree — he was not yet licensed to operate a
casino in Nevada. Schwab promptly filed an application with the Nevada
Gaming Control Board. But if he thought that obtaining a casino license
would be as easy as getting a loan out of Ken Kidwell, he was in for a rude
surprise."

While Schwab was awaiting word on his casino application, he took stock
of thrift deregulation and decided he could also benefit by owning some savings

164 • INSIDE JOB

and loans. "■ He had been a customer at Freedom Savings of Tampa since
1984 (Cuyahoga had offices in Tampa), and in December 1985 a Freedom
Savings officer asked him to invest in Freedom stock. Freedom Savings, a $1.5
billion thrift that was well known among regulators for its use of high-cost
brokered deposits to fund risky real estate development projects, was desperate
for capital to meet a new regulation that increased the size of the reserves an
S&'L had to maintain, hi January 1985, FHLBB Chairman Ed Gray had tough-
ened the reserve requirements in an attempt to stop the fast growth and risky
lending that he saw in progress all over the country.'^ The new regulation
caught a lot of high-flying thrifts like Freedom Sa\ings with their reserves down,
and Freedom officers were looking for investors willing to pay cash into their
reserves in exchange for stock.

When the Freedom Savings officer invited him to buy stock in the thrift,
Schwab bluntly laid his cards on the table. "1 informed him 1 would but that
I am a businessman and if I were to invest in a losing bank to help it during
a difficult time, I would expect a reasonable treatment when I applied for new
loans. ... It was agreed that I would pick up any shortfall that the other
investors did not produce. In return I was able to borrow $?.2 million — without
paying points — for each million worth of stock 1 purchased. . . ."'* In other
words, Schwab demanded the right to borrow from Freedom Sa\ings three
times the amount of his investment. It was strictly illegal for an S&'L to make
such a quid pro quo arrangement, but P'reedom Savings agreed because it
needed Schwab's investment.

Schwab paid about $7 million for a 5.9 percent stake in Freedom Savings,
which promised him up to $24 million in loans, in disregard of regulations
that forbade an S&'L to make loans equaling more than 10 percent of its assets
to any one borrower. Court records showed that, as it turned out. Freedom
Savings actually loaned him $4. 5 million on projects in Arizona and $7 million
on a project in Philadelphia.'" (All the loans eventually went into default.
Freedom Savings failed in July 1987.)

When we checked further into Freedom Savings, we found our old familiar
friend Charles Bazarian. Charlie was getting to be like a touchstone to
our investigation — kind of a litmus test to see if a thrift was of the accom-
modating persuasion. Fuzzy had taken a shine to Freedom Savings, too, and
he bought a 9.9 percent stake in the thrift. Sig Kohnen, a longtime friend
of Bazarian who helped him start CB Financial in 198?,-" told the Tulsa
Tribune Bazarian bought stock in savings and loans as a way to meet lenders.-'
As co-shareholders in Freedom Savings, Bazarian and Schwab soon struck up
a relationship, Bazarian told us, and before long CB Financial began arranging
loans to Schwab ventures. (Those loans would later go into default, Bazarian
said.)

At the same time that Schwab was buying into Freedom Savings in Tampa,

Casino Federal '165

he was taking control of Southern Floridabanc Savings Association in Boca
Raton, Florida, by buying $^ million in preferred stock with a loan from First
Federated Savings of West Palm Beach. Schwab was on a roll.

But if things were going well in Florida for Schwab, they were going poorly
in Nevada. He had hired a consulting firm (that specialized in helping
people get gaming licenses) to help him navigate the Nevada Gaming Control
Board investigation. But after listening to Gaming Control Board concerns,
the consultants handed Schwab a thick report so damning it became obvious
that he would never pass muster. Schwab's gaming consultants reminded him,
for example, that the main purpose for allowing casinos in the state was to
generate tax revenues for Nevada, and the Gaming Control Board was not
likely to look with favor on someone who had been successfully avoiding taxes
for 20 years. '^ Schwab's consultants also zeroed in on his maze of companies
and nonexistent records. In a written report they said Schwab admitted that
he used money from his companies interchangeably, or funneled money from
one through another, for whatever purpose he pleased. When asked why his
companies didn't keep minutes of board meetings, he replied that he and his
wife had a board of directors meeting every time they sat down together.

The consultants noted in their report that the Gaming Control Board might
not be impressed when they learned that Schwab had been called to testify
before the grand jury investigating the Abscam sting'' and Morris Shenker
(whom the consultants included on their "persons believed to be unsuitable
by law-enforcement authorities" list). They were referring to an occasion
when undercover FBI agents posing as Arabs met Schwab on a boat at Del
Ray Beach, Florida, and asked him if he could guarantee them a gaming
license in New Jersey. Their question was prompted, Schwab told the gaming
consultants, by his association with Morris Shenker and the Dunes Hotel
and Casino project in Atlantic City. Schwab said his answer to the "Arabs"
was no.

Schwab's loan from Eureka Federal Savings, ostensibly to renovate the
Players Casino, was also under scrutiny by the gaming board. He had put up
property that had cost him only $1.4 million as security for the $7.5 million
loan from Eureka Federal Savings. Schwab contended that, no matter what
the property cost him, it was worth $16 million to $25 million, based on what
it would be worth as a "going concern" someday. A bank appraisal obtained
later said the property was worth $267,000, the gaming consultants noted in
their report.

When the Gaming Control Board investigators interviewed Schwab, they
asked him about "meetings at night with potential undesirables" and ten men
with Italian surnames, prompting Schwab's gaming consultants to comment in
their report to Schwab, "We have no specific records available to us regarding
the backgrounds of these individuals. We can only presume at this point that

166 • INSIDE JOB

the Gaming Control Board has information from law enforcement authorities
associating these individuals with organized crime activities in the United States."
Several of the men were connected to Schwab businesses. Schwab admitted
knowing one of the men was a loan shark but he denied knowing the man was
also a heroin dealer.

To top it all off, Schwab's own consultants said he failed to tell the truth,
the whole truth, and nothing but the truth on his gaming licensing application:
He told about the old perjurv' indictments but didn't mention the larceny charges
because, he said, he thought they were the same thing. He also contended there
were years when he was not employed. Schwab's consultants went on to say that
he hadn't told about his gambling debts. Further, he hadn't told about all of
his companies because, he said, "They never did anything" or were "owned by
other members of the family."

It was hard, gaming board inveshgators concluded, to "get a handle on you
[Schwab]." Schwab must have seen the handwritmg on the wall. He dropjjed
his application for a casino license, defaulted on the $7. 5 million loan from
Eureka Savings, and beat it back to the East Coast. (Regulators said Schwab
used part of the Eureka Federal Savings loan for a project he had gomg in
Philadelphia. Eureka Federal lost between $5 million and $7 million on the
Schwab loan.)

What most intrigued us about the Schwab story was the ease with which he
was able to become a major stockholder in two federally insured savings and
loans (Freedom Federal Sa\ings and Southern Floridabanc) at the \ery time that
a Nevada gaming board was finding reasons to deny him a license to run a small
gambling house.

After Schwab gave up on the Players Casino project, he overextended him-
self in real estate developments on Hilton Head Island off the coast of South
Carolina. Within a year he claimed to be broke. In November 1986 Schwab
and Mary filed personal bankruptcy in New York (chapter 7 — liquidation).
Soon Cuyahoga Wrecking filed chapter 1 1 (reorganization). The St. Petersburg
Times reported that a bankruptcy command post was set up in a large room
at the Columbia, South Carolina, courthouse right next to a similar one for
the only other case that size, the bankruptcy of )im and Tammy Bakker's PTL
Club.

Schwab had been a very private man. Only in bankruptcy did the scope
of his empire become public. L'ltimatcly there would be 15 Schwab-related
bankruptcies in New 'V'ork, mosth the Cuyahoga companies, and eight in
South Carolina. Investigators admitted Schwab's business affairs were so
complex — and. as before, many important records had disappeared, according
to Schwab's bankers — that they couldn't even tell how many companies
Schwab owned. At first creditors filed claims totaling $135 million, but
hundreds of millions were later added. Bankruptcy court records showed that

Casino Federal '167

as of July 1988 there were 10'? creditors, including Bazarian's company, CB
Financial. The overall debts of i'liilip Schwab, Cuyahoga Wrecking, and re-
lated companies were pushing the half-ii7//on-dollar mark and growing.
Schwab owed $200 million of that amount to thrifts and banks from Israel
to California.

"This bankruptcy has already generated enough paperwork to kill half the
national forests," said one attorney.

Representatives of several financial institutions got together to try to figure
out how to best collect the money Schwab owed them, "it was like an Al-
coholics Anonymous meeting, with all of the bankers standing up and con-
fessing their invoKement with Cuyahoga and Schwab," a Chicago lawyer
present at one meeting told a reporter. Ultimately the bankers decided there
was no hope. As they would later testify in court, they believed Schwab had
bamboozled them, sometimes using the same collateral — by moving it secretly
in the dead of night — to secure several loans at one time. He had operated
a shell game, they said, that was nothing more than a fancy pyramid scheme,
using oft-pledged assets (such as steel from demolition jobs) to get new loans
that he used to pay off old ones. Thrifts banging on Schwab's door included:
Crosslands Savings in New York, First American Bank and Trust in Lake
Worth, Florida,-^ Freedom Savings of Orlando, South Chicago Savings in
Chicago, American Pioneer Savings in Stuart, Florida, Harris Trust and Sav-
ings in Chicago, Community Savings in North Palm Beach, Eureka Federal
Savings in San Carlos, California, Southern Floridabanc Savings in Boca Ra-
ton, Florida, First Federated Savings in West Palm Beach, and Concordia
Federal Savings of Philadelphia.

In October 1988 Schwab was convicted of paying an Environmental Pro-
tection Agency inspector $25,000 in bribes between 1983 and 1987 to overlook
violations Cuyahoga Wrecking Company committed while removing asbestos
from building and construction sites. (Schwab had removed the asbestos from
Carnegie Hall "so Frank Sinatra wouldn't get asbestos in his lungs" when he
sang there, an employee said.) Schwab was sentenced to 42 months in prison.
The national media reported that Schwab was also under investigation for vi-
olations regarding illegal handling of toxic wastes in Maryland and Delaware,
for other environmental violations in Chicago, and for bank fraud in South
Carolina. And in New York the U.S. attorney's office, headed at that time
by headline-making Rudolph Giuliani, was digging into Schwab's deals with
New York thrifts and banks.

Another one of Kenneth Kidwell's casino loans went to John B. Anderson.
Anderson was a giant of a man, six feet three inches tall and barrel-chested, a
farm boy, mostly a tomato grower, who had grown up in the agricultural com-

168 • INSIDE JOB

munities near Yuba City, California. He put himself through the branch of the
University of California in his hometown of Davis in the 1960s, majored in
agriculture, and began work as a humble sharecropper. The fundamental values
of hard work and living close to the land stayed with him while he became a
millionaire many times over. An admirer told us that even after he made his
fortune Anderson expected his children — to whom he was a good father, his
neighbors said — to work for minimum wage.

But to the farmer's solid values Anderson added burning ambition. He told
his hometown friends that his dream was to be the nation's single largest agri-
cultural land owner. He knew he would have to accomplish that feat with
borrowed money, of course, and borrow he did. Along the way he acquired vast
holdings in Nevada, California, Arizona, and Louisiana. On paper Anderson
was worth millions, but he was deeply in debt. When the agricultural recession
hit in the early 1980s, his loans went sour. So, too, did his financial obligations
elsewhere. By early 1985 newspapers would report that Anderson was being sued
for $56 million by a host of creditors.

None of this misfortune dampened Ken Kidwell's willingness to extend
Anderson credit. In 1984 Kidwell convinced Anderson to buy a controlling
interest in the Dunes Hotel and Casino in Las Vegas.

When Kidwell first heard that the Dunes could be bought from reputed mob
associate Morris Shenker, who had filed for bankruptcy in |anuar\' 1984 (Shenker
was neck-deep in trouble over about $197 million in debts, including loans from
various union pension funds, banks and thrifts, and unpaid taxes of about $66
million), Kidwell first thought of his friend Wayne Newton as a potential buyer,
he later told his Nevada attorney. But to his dismay he discovered that San
Francisco loan broker J. William Oldenburg — whom Kidwell had introduced
to Newton — had already convinced Newton to let Oldenburg broker the Dunes
deal for him. Furious, Kidwell said he callea Anderson, to whom Eureka Federal
had already made several agricultural loans, and suggested that Anderson buy
the Dunes. Anderson had first entered the gambling world with his 1981 purchase
of the Maxim Hotel and Casino in Las Vegas and his 1982 purchase of the
Station House hotel-casino in Tonopah, Nevada.

Anderson agreed. Eureka Federal was willing to put up the $25 million
letter of credit (a guarantee to loan on demand) that would be required to swing
the deal. In the meantime an option had to be acquired to ace out Oldenburg
and Newton. Kidwell called San Antonio loan broker John Lapaglia for help
with that end of the deal.

In the end the Kidwell/Anderson team beat out the Oldenburg/Newton team
when those negotiating the Dunes sale said they preferred a letter of credit from
a federally insured institution (Eureka Federal) to Oldenburg's financing package,
which an associate said was mostly personal notes and guarantees. When An-
derson applied for the Dunes gaming license, he sailed through the rigorous

Casino Federal •169

Nevada State Gaming Control Board investigation. He assumed control of the
Dunes from Shenker in 1984 but retained Shenker's son as a vice president and
said Shenker himself would remain a board member."

Some in Nevada's gaming industry wondered out loud if Anderson was "a
beard" (fronting) for Shenker or for other interests that could not pass a Gaming
Control Board muster. Such rumors had first surfaced a few months after An-
derson had gotten control of the Maxim Hotel and Casino. The St. Louis Posf-
Dispatch broke a story that claimed organized crime figures from St. Louis,
Kansas City, Chicago, and Denver had tried unsuccessfully to purchase the
Maxim in 1982. The story said that sources in Las Vegas and Denver had told
them, following that failure, that they had "put together another attempt to
penetrate legal gambling in Nevada." The story identified the mobsters involved
in the alleged plot as being Tony Giordano of St. Louis, Eugene Smaldone of
Denver, Joe "Joey Doves" Aiuppa of Chicago, and Nick Civella of Kansas City.
State Gaming Control Board member Dale Askew characterized the story as
"street talk" and said that the related rumors that John Anderson was acting as
a front for organized crime were "thoroughly checked out and discounted at the
time Mr. Anderson was licensed. We did not find a thing."

Later the Las Vegas media reported that the Gaming Control Board was
checking into Anderson's relationship with Eureka Federal Savings and Loan
and Kenneth Kidwell. Following the Dunes deal, the Gaming Control Com-
mission declared Eureka Federal an unacceptable source of funds for future
casino acquisition. They gave no explanations for their action, but Kidwell
complained in a letter to his attorney that the Dunes deal had caused him to
become "trapped in Shenker's shadow."

Kidwell wrote that it had surprised him to read in the newspapers that he
had ties to Morris Shenker and various mobsters. He complained that even some
of his Eureka Federal customers thought he was working with the mob. He said
that John Anderson called him one day and asked if it were true that he (Kidwell)
was "washing money for one of the families."

Whatever problems there may have been at Eureka Federal Savings may
never be known. Although the Nevada Gaming Control Commission was clearly
concerned, the FHLBB was not. Even though some of the most prominent thrift
looters we investigated were borrowers at Eureka Federal, even though one
employee received phone threats just before she was to be deposed, even though
a director told us he had been threatened by an officer, even though 170 loans
were in default at Eureka Federal, regulators told us they had investigated Eureka
Federal and found no evidence of fraud there. Mitchell Brown, a ubiquitous
borrower who had also been co-owner of First National Bank of Marin in San
Rafael, California, until he was forced out by regulators, felt differently.^'' Just
before Brown was indicted for bank fraud in Oregon, according to investigators,
he asked the U.S. attorney if he could cut a deal. He wanted blanket immunity.

170 • INSIDE JOB

he said, for what he had done at Eureka Federal, but he would not tell regulators
what he had done there (and they did not cut him a deal). His trial was pending
as of this writing.

Si.x months after John Anderson's successful purchase of the Dunes, in Mav
1984, he submitted an application to the Gaming Control Board to purchase
the Las Vegas Sundance Hotel, owned by M.B. "Moe" Daiitz, Mike Rapp's
old Las Vegas buddy. The Gaming Gontrol Board announced they were going
to conduct another thorough review of Anderson's finances, including his as-
sociation with persons doing business with San Marino Savings and Loan in
Southern California. According to published reports, Anderson suddenly with-
drew his licensing application without explanation, (in referring to San Marino
officials may have had Jack Bona in mind. See next casino story.)

Like many other ambitious Anderson ventures, the Dunes turned out to be
a giant money loser. Anderson put the Dunes into bankruptcy in September
1985 for protection from creditors, who were owed $117 million. Anderson
would eventually leave Eureka Federal Savings stuck with nearly S?2 million
in his delinquent loans. A source close to the Eureka Federal Savings case said
in late 1988 that Anderson was attempting to bring the loans current by making
monthly payments of $500,000.

According to media accounts, Anderson also defaulted on $22 million in
loans from Crocker Bank and $2. 1 million borrowed from Aetna Life Insurance
Company. He had $4? million in debts on his various real estate holdings and
owed $68.6 million to Valley Bank of Nevada. After tapping out these sources
Anderson headed north to Oregon, where authorities said loan broker Al Yarbrow
helped him get $25 million in loans out of State Savings of Corvallis. Yarbrow
also introduced Anderson to Charles Bazarian and Anderson later borrowed
money through Bazarian's CB Financial. We would find Anderson's footprints
at Vernon Savings in Dallas as well. (See Texas chapters.)

Jack Bona and his partner, Frank J. Domingues, got $200 million in loans
from San Marino Savings and Loan in San Marino, California,-' in ten months,
even though tax records showed that three years earlier they had reported com-
bined incomes of less than $30,000.-'* (Remember that the next time a banker
tells you you don't earn enough to qualif\' for a $9,000 car loan.) The plan they
submitted to San Marino was to convert apartment units to condos and sell them
as tax-shelter rentals to investors in high income-tax brackets. When San Marino
failed in December 1984-" regulators charged that the properties on which San
Marino lent Bona and Domingues $200 million were worth onl>' about $100
million. Most of the loans were in deep default, and the properhes turned
out to be in such bad neighborhoods in Dallas and Los Angeles that even an
internal memorandum at San Marino .showed that the thrift's staff referred to

Casino Federal "171

tliem as "the Zulu projects." A California thrift director who went to Texas to
look at the condos for himself sent back a memo with this discouraging word:
"They are NO'I' convertible [into condos) except to a BLIND investor." Reg-
ulators claimed Bona and Domingues pocketed up to $50 million for themselves
on these projects. Domingues told reporters that they made only about $10
million.

Remarkably, even as regulators were wringing their hands over what Bona
and Domingues had done to San Marino Savings, the two new millionaires
were buying their own savings and loan nearby. South Bay Savings. "Apparently
the left hand didn't know what the right hand was doing," deputy California
Savings and Loan Commissioner William Davis said later (he became deputy
commissioner after the South Bay affair). The San Diego Union reported that
Domingues said he would never allow his thrift, South Bay, to make the kinds
of loans that San Marino had made to him and Bona. Be that as it may regulators
later revealed that the day the two men bought South Bay, they had the thrift
loan them $6 million."'

Shortly after opening South Bay, Jack Bona" split with Domingues. He sold
out his share in South Bay to Domingues" and in 198? purchased another kind
of financial institution, Morris Shenker's troubled 664-room Atlantic City Dunes
Hotel and Casino project. Shenker had begun the project just before defaulting
on millions in loans from union pension funds. Now it was little more than a
rusting abstract sculpture of I-beams in the middle of town. Shenker sold the
project to Bona shortly before John B. Anderson bought Shenker out at the Las
Vegas Dunes. Bona kept the Atlantic City Dunes for a couple of years, during
which time he added a few more millions in loans to the project's crushing
debt," and then he defaulted and filed for bankruptcy in 1985.

The Dunes was put up for sale by the bankruptcy trustee and sold in 1988
to Royale Group Ltd., run since 1981 by Leonard Pelullo. We remembered
Pelullo because his name had shown up without explanation in documents
regulators had seized from Consolidated Savings. The handsome, swarthy Pe-
lullo, who was 37 in 1988, worked out of an office in the Carlyle Hotel in
Miami Beach's Art Deco district. BusinessWeek reported that he described him-
self as a "workout" specialist, a consultant who helped companies drowning in
debt. The still-unbuilt Atlantic City Dunes project certainly qualified.

But Pelullo may have had a darker side. BusinessWeek also reported that he
had recently worked under the alias Bob Paris because, Pelullo reportedly said,
he wanted to avoid drawing attention to a New Jersey State Commission of
Investigation report on boxing that described him as "a key organized crime
associate from Philadelphia." Pelullo denied any ties to the mob.

In June 1989 a Cincinnati grand jury handed down an indictment against
Pelullo and David A. Friedmann, a Houston businessman who from 1983 to
1985 was owner and CEO of Savings One, a thrift in Gahanna, Ohio (Mario

172 ■ INSIDE JOB

Renda and Martin Schwimmer attempted to purchase Savings One in 1983).
The indictment charged the two men with conspiring to obtain loans from the
thrift that were used for purposes other than stated on the loan application. The
indictment also charged that Pelullo paid Friedmann $145,UOO in kickbacks for
arranging the loans. Pelullo said the money was pre-paid interest on a loan
extension he expected to receive. The case was pending at this writing.

We had run into the casino connection at Consolidated as well. One of
Consolidated Saving's problem loans, regulators claimed, was a $614,311 loan
to Robert Shearer and Llewellyn Mowery for refurbishing the Treasury Hotel
and Casino in Las Vegas. Shearer and Mowcrv' refused to repay the loan,
according to regulators, unless Consolidated loaned them $3 million more.

Consolidated Saving's owner, Robert Ferrante, got into the casino act per-
sonally, court records showed, when he and Mario Renda teamed up for a casino
project in Puerto Rico that they called the Palace Hotel and Casino.'^ After
Consolidated failed and Renda found himself enmeshed in all manner of crim-
inal and civil difficulty, the Palace Casino was allowed to go into bankruptcy
and Las Vegas newspapers reported that the project was purchased out of bank-
ruptcy by the Pratt Hotel chain, a division of Southmark, Inc.. a Dallas-based
conglomerate that also owned San Jacinto Savings and Loan in Houston (see
Chapter 21).

By far the most frequent casino connection we ran into at failed thrifts around
the country was the Las Vegas-based Dunes Hotels and Casinos company and
its chairman, Morris Shenker. Shenker, born in Russia in 1907, had been an
attorney in St. Louis since 1932. He first came to national attention in the early
1950s during the congressional hearings of the Kefauver committee, which
investigated the influence of organized crime in interstate commerce. Twenty
years later Life magazine detailed his alleged mob ties in an expose of a former
St. Louis mayor (by then, ironically, Shenker had been appointed chairman of
the St. Louis Commission on Crime and Law Enforcement, a position he held
from 1969 to 1972). In 1975 Penthouse magazine said Shenker was under in-
vestigation by a federal strike force and grand jury in St. Louis and added, "His
Byzantine financial maneuvering astounds investigators in and out of govern-
ment."

The source of Shenker's power appeared to be his lengthy and well-publicized
relationship as chief attorney and confidant of Teamster union president Jimmy
Hoffa. Hoffa was Teamster boss from 1957 until he went to prison in 1967, and
he continued to run the union from prison for several years. (He was released

Casino Federal • ^73

from prison in 1971 and disappeared in 1975 as lie was attempting to regain
control of the Teamsters. Authorities believe he was murdered.) Ihe President's
1986 Commission on Organized Crime reported that the Teamsters, the nation's
largest union, had been ■'firmly under the influence of organized crime since
the 1950s." In 1989 the FBI released material collected for the FBI by Teamster
president Jackie Prcsser during the nine years he was an FBI informant, until
he died in 1988 of brain cancer. The documents showed a union dominated
by organized crime and corruption.

As Teamster leader, Hoffa controlled the massive ($400 million in 1967,
$1.6 billion in 1977) Teamsters' Central States Pension F'und. He directed that
millions of the fund's dollars be loaned to associates and mobsters, and over the
years the fund became, as autiior Steven Brill wrote in The Teamsters, "a special
bank where loans depended almost always on the right kickbacks or the right
organized crime connections." By 1974 Shenker had more than $100 million
in loans from the fund, for the Las Vegas Dunes and other properties, according
to Brill. The President's 1986 Commission on Organized Crime said that Shenker
received the largest single loan ever made by the fund, a portion of which had
never been repaid. With that access to millions came, apparently, tremendous
power.

Hoffa pioneered the use of Teamster pension funds to finance casinos in
1960. The Penthouse piece said Michael Rapp's buddy Moe Dalitz helped per-
suade Hoffa to finance Nevada hotels and casinos." In Las Vegas the Teamsters
at one time backed Dalitz's Desert Inn, Circus Circus, the Fremont, the Lodestar,
the Plaza Towers, the Stardust, the Landmark Hotel, the Four Queens, the
Aladdin, and Caesar's Palace; in Lake Tahoe, the King's Castle, the Lake Tahoe,
and the Sierra Tahoe; in Riverside, the Riverside; and in Overton, the Echo
Bay, according to investigative reporters Jonathan Kwitny and Steven Brill.
Presser told the FBI that profits from Las Vegas casinos were illegally skimmed
and mob couriers took the cash away in suitcases.

Shenker got control of the Las Vegas Dunes with the promise of a $40
million advance from the Teamsters' Fund, and we came across him or the
Dunes numerous times in our investigation. Erv Hansen at Centennial gambled
at the Dunes regularly, reportedly sometimes dropping $10,000 at the roulette
table in a single night. Norman B. Jenson had been a Shenker business associate.
Shenker made the Dunes a hospitable place for thrift officials and even occa-
sionally provided suites where deals could be cut, as when Winkler, Daily, and
Russo met there to formalize their Indian Springs State Bank project. The Dunes
Hotel and Casino and several of Shenker's associates received loans from Indian
Springs State Bank. Jack Bona bought the Atlantic City Dunes from Shenker
and John Anderson bought the Las Vegas Dunes, both using S&L credit, when
Shenker was in deep financial trouble. Shenker was mentioned in Renda's 1981

174 ■ INSIDE JOB

desk diary. Nevada gaming documents revealed Philip Schwab was a Shenker
associate, as was Eureka Federal Savings President Kenneth Kidwell, who also
knew Jackie Presser well.

When Sun Savings in San Diego failed in July 1986, court documents
showed that the president, Daniel W. Dierdorff, had loaned Shenker almost $2
million, which he never repaid. Shenker often entertained Dierdorff at the
Dunes, regulators said, and Dierdorff used Shenker's jet for gambling trips to
the Dunes and other personal trips. Shenker maintained a $25,000 line of credit
in Dierdorffs name at the Dunes. Also around that time Dierdorff opened an
account at another savings and loan under an assumed name and deposited
more than $200,000 to that account in 1983. Dierdorff later pleaded guilty to
two felony bank fraud charges, but the source of the money remained a mystery.
He was sentenced to eight years in prison in 1989.

Why would Shenker, who appeared to have a direct pipeline to limitless
Teamster pension-fund money, be so solicitous of his connections within the
SdrL industry? Becau,se in 1983 the Labor Department finally wrestled control
of the Teamster Central States Pension Fund away from the mob. With its
immense appetite for money, Shenker's empire was in crisis. How serendipitous
for Shenker, then, that at that ver>' moment Congress was obligingly deregulating
savings and loans. Without missing a beat Shenker swung into his savings and
loan mode, and when he had to sell the Dunes in 1984 (a massive court judgment
against him, on behalf of a pension fund he owed millions, forced him into
bankruptcy), his hunt for fresh money intensified. Legitimate bankers wouldn't
loan to him, so he needed insiders like Dierdorff, over whom he had some
control. Better yet, suppose he could use a beard to front for him and take control
of a thrift? That's apparently when he thought of Charles Bazarian, a heav>'
gambler at the Dunes (his 1987 bankruptcy filing revealed he owed the Dunes
$174,000).

In early 1985 Bazarian was buying stock in savings and loans as a way to
meet lenders. (Not until his indictment in September 1986 at Florida Center
Bank with Rapp and Renda did his wheeling and dealing begin to catch up with
him. ) He bought 9.9 percent of Freedom Savings in Tampa (the maximum that
could be acquired without regulatory approval), where he met Philip Schwab.
A month later he bought 9.9 percent of Bloomfield Savings and Loan (for a
reported $731,000) in a ritzy suburb of Detroit, and two weeks later, in early
April 1985, he showed up there with his hand out for a loan. He didn't come
alone, however. With him were Shenker and loan broker Al Yarbrow. Bazarian
later said in court depositions and in conversations with acquaintances that the
Bloomfield connection was Shenker's idea. He said Shenker had a friend with
connections to the chairman of Bloomfield, and Shenker wanted Bazarian to
get control of the thrift, make Shenker's friend chief execuhve officer, and
approve loans to Shenker.

Casino Federal ■ 1 75

A former Bloomficid official told Detroit Free Press reporter Bernic Shcl-
kim, who dug up much of the Bloomfield story, that Bazarian's approach
at the meeting was that he was a partner in the thrift, he wanted to help it
make money, and one important step it should take was to loan to his com-
pany in Oklahoma City. The former thrift official said Bazarian was "loud
and aggressive — a pound-the-table type guy" whose message was, "Here's
what you should do, you dummies." The thrift's chairman e\idently agreed,
saying in a memo to thrift directors that Bazarian would bring "the huge
loan demand and deep pocket which we have been trying to find."

Bank records show that on April 22 the thrift approved a $15 million loan
for Bazarian {the loans-to-one-borrower limit at Bloomfield at that time was $3. 5
million) backed primarily by real estate that regulators later said turned out to
be overappraised or already pledged as collateral for another loan someplace
else. Court records showed Shenker was to share in a finder's fee for taking
Bazarian to Bloomfield.

The new president at Bloomfield (promoted to the position in February),
unfortunately for Shenker, was a career banker who vehemently opposed the
Bazarian loan, and within two weeks the thrift was trying, without success, to
get its money back." By late 1988 Bloomfield was hopelessly insolvent and
regulators seized control.

Shenker's assault on the thrift industry was massive. No one will ever know
its true extent. As this book was going to press, we learned that Shenker had
tried to borrow from Freedom Savings in Tampa, and a highly placed law-
enforcement official told us he had just discovered that Shenker had borrowed
from Liberty Federal Savings in Leesburg, Louisiana (Liberty later collapsed),
a thrift with connections to an incestuous Texas banking network we discuss
later in this book.

In 1988 Shenker, 82, suffered two heart attacks, and when we tried to contact
him at his St. Louis office, a spokeswoman told us he was in poor health in a
St. Louis hospital. In February 1989 he was indicted in Nevada on two counts:
conspiracy to commit bankruptcy fraud (by concealing money from creditors)
and conspiracy to defraud the IRS. A Nevada Gaming Control Board investigator
told us that when he had investigated Shenker years ago he found him to be "a
financial Svengali with over 105 corporations between which he was shuttling
money."

In 1982 Congress passed the Carn-St Germain Act, which allowed thrifts
to begin to invest in areas other than home mortgages so they could diversify
their portfolios of investments and protect themselves against swings in interest
rates and other market fluctuations. No one suggested that casinos were a great
hedge against inflation, deflation, or stagnation, but within months after thrifts

176 • INSIDE JOB

were deregulated, millions of dollars in loans were flowing into casino operations.
Casinos also used junk bonds, many arranged through Drexel Burnham Lambert,
to finance their acquisitions and expansion, and some of those junk bonds, we
discovered, ended up in the portfolios of troubled thrifts who bought them hoping
that their potentially high returns would pull their thrifts out of trouble.'"

"These guys are going to have a rude awakening when the day comes that
junk bonds live up to their name," one thrift analyst told us.

Of all the thrift/casino deals we discovered, not a single one resulted in
anything but substantial losses for the thrifts. Like the union pyension funds that
came before them, thrifts were always the losers in the casino game, while the
high rollers — some with long-standing mob ties — emerged unscathed. The ca-
sino connection was a financial black hole that sucked millions in insured deposits
off to who knows where.

CHAPTER FIFTEEN

Gray; Stockman^ and the

Red Baron

In the suninier of 1984 swindlers like Mike Rapp were looting thrifts like Flushing
Federal with wild abandon, unobserved and unobstructed. But some isolated
cases of abuse had begun to surface, enough to convince FHLBB Chairman Ed
Gray that deregulation had been carried too far. No sooner had Empire Savings
in Dallas collapsed in March 1984 than the problems at San Marino Savings
in Southern California came to his attention' (the failure of the two thrifts cost
the FSLIC an estimated total of $600 million), and on their heels came word
from the San Francisco FHLB to brace for more of the same. At least a dozen
more San Marinos were in various stages of insolvency, they told Gray, and
Gray's people in Texas were sending back the same message. In the first half of
1984, Gray faced one crisis after another.

In April the industry got unwanted publicity when the San Francisco Ex-
aminer reported on what it said was a land flip orchestrated by San Francisco
loan broker J. William Oldenburg at State Savings of Salt Lake City. Reportedly
Oldenburg bought 363 acres of land in Richmond, California, in 1977 for
$874,000 (he actually paid only $80,000 in down payment, the paper reported).
In 1979 he hired an appraiser who appraised the land at $32.5 million. Just a
little over two years later, in 1982, the same appraiser decided the land was
worth $83. 5 million. In 1983 Oldenburg bought State Savings for $10. 5 million.
In 1984 he sold the Richmond property to State Savings for $55 million, the
Examiner reported.- Oldenburg resigned as chairman of State soon after a searing
article appeared in The Wall Street Journal in June 1984.'

On July 31a congressional committee released a report that made public
for the first time the causes for the collapse in March of Empire Savings near
Dallas. Pressure on Gray to do something about the emerging problem was
building. But do what? The growing number of insolvencies presented Gray
with a heads-I-win, tails-you-lose dilemma. If he ordered all the insolvent in-

177

178 • INSIDE JOB

stitutions closed, as the law required, the FSLIC would be liable for billions of
dollars in losses. If the dying thrifts were allowed to continue operating, they
would only sink deeper into the red. Cira)- began to gear up for an extended
battle to get the thrift industr\' back under control and to try to develop a plan
for responding to the emerging crisis.

The last thing he needed then was a run-in with Charlie Knapp. Knapp was
dashingly handsome, a young, self-styled financial visionary whose gold-plated
faucets, in the lavatory of his company's $14 million Lear jet, have become part
of the lore of those go-go S&L years. He ran Financial Corporation of America
(FCA) in Irvine, California, south of Los Angeles. FCA in turn owned American
Savings and Loan of Stockton, California, which was at the time the largest
thrift association in the country. FCA was one of Gray's rapidly emerging head-
aches. The company was on a growth cunc that pointed straight up. in just
one year, 1983 to 1984, VC\ had grown from an already staggering $22 billion
in assets to an unbelievable $32 billion. Regulators said Knapp used brokered
deposits and jumbo CDs sold through his own money desk"* to invest in fixed-
rate mortgages and sophisticated hedging instruments that regulators and the
Securities and Exchange Commission had a very difficult time understanding
or evaluating. They couldn't see how^ FCA was coming up with the profits it
was reporting while at the same time it was drowning in repossessed real estate.

FCA had invested billions in old, fixed-rate loans at the very time the rest
of the industry was rushing to safe adjustable-rate loans. And court documents
later revealed that FCA had its share of risky commercial development projects
in California and Texas as well. Delinquencies piled up and regulators said FCA
was making outrageous deals in order to sell the properties it had already had
to repossess. At one time, Knapp told us, he had 300 people working in FCA's
repossessed properties department. ^

Among Knapp 's borrowers was the ubiquitous Morris Shenker. FCA had
loaned millions to the Las Vegas-based Dunes Hotels and Casinos when Shenker
was chairman. (When Shenker ran into financial woes. FCA was partly bailed
out by Jack Bona, who purchased the Atlantic City Dunes project in 1983.*
However, as of October 198'> FCA was reportedly the Dunes' largest creditor
with a $51 million mortgage on the Las Vegas Dunes' building.)

Another borrower was Leonard Pelullo. Pelullo and American Savings and
Loan eventually became entangled in litigation over a $13 million mortgage.
(The Atlantic City Press reported that circumstances surrounding Pelullo's busi-
ness relationship with American prompted a grand jury investigation in 1986
but no indictments resulted." In 1988 Pelullo's Royale Group Ltd. bought the
Atlantic City Dunes.)

Gray didn't like Charlie Knapp's way of doing business and wanted him out
of the thrift industry. If FCA failed, the weight of its $32 billion portfolio would
pull the FSLIC fund down in one swoop.

Gray, Stockman, and the Red Baron • 1 79

From Washington, Gray called Knapp at his offices in Irvine, California,
and said lie wanted to see him in Washington as soon as possible. Knapp flew
straight to Washington to confront the chairman on his own ground.

"Mr. Gray will see you now," the receptionist told Knapp, a dapper dresser
nicknamed "the Red Baron" by his friends because he flew a vintage P-38 World
War II fighter. But this was one dogfight Knapp wasn't going to win. The meeting
between Gray and Knapp began at 2:15 p.m. and Gray had another meeting
scheduled for 2:30 that he could not miss. Gray told us he read Knapp the riot
act, quoting chapter and verse on everything he disliked about FCA's operations.
He accused Knapp of running FCA in an "unsafe and unsound manner." The
phrase was a provocative one and Knapp could not miss its significance — it was
the very phrase the FSLIC used when it closed thrifts and sued former owners
for the losses.

"Because of your irresponsible actions," Gray said he continued, "you've
placed in jeopardy the entire savings and loan industry, Mr. Knapp, and I'll do
everything in my power to make sure you are removed from this industry. I'm
putting you on notice." Gray looked down at his watch. It was 2:30, and he was
a busy man.

Knapp remembered the meeting a little differently. He told us Gray greeted
him with, "I understand that your loan portfolio is not sound."

Knapp said he asked Gray, "What do you base that on?"

Gray pulled out of his shirt pocket an article from the business section of
The New York Times and started reading. As Knapp later recalled it to us, "I
just threw up my hands and said, 'The hell with this, I've gotta get out of here.'
I couldn't get out of there fast enough."

Regardless of the version you believe, it was clear that the normally flam-
boyant, self-assured Knapp was caught by surprise by the vigor of Gray's attack.
This was not the dopey "Mr. Ed" his friends in the industry had told him to
expect. The Red Baron had been shot down in flames.

"I fly all the way from California and the guy gives me 1 5 minutes and
shows me the goddamn door," Knapp told us later.

Shocked, Knapp returned to California, formulated a plan, and called Gray
to make a proposal. This time Gray had to listen because FCA was too big to
shut down, no matter how rotten it may have been. Somehow Gray had to keep
the company going, like a ward of the FHLBB, until its problem assets could
be disposed of in an orderly manner over a long period of time. Knapp knew
the bind that Gray was in and offered him a deal. Knapp agreed to leave
voluntarily on two conditions: first, that he be allowed to select his successor,
pending Bank Board approval, and, second, that Gray agree to a $2 million
golden parachute for Knapp. Gray agreed.

Knapp hung up the phone and called Washington again. This time he
phoned the Office of Management and Budget.

180 • INSIDE |OB

"David Stockman, please. Tell him Charlie Knapp's on the line."

Knapp told us he called Stockman^ and said that Gray had forced him out
of FCA. Knapp asked Stockman if he would be interested in the job. Stockman
had been President Ronald Reagan's spokesman on budget matters since Reagan
took office in 1981, and he had made it known he was getting tired of taking
the heat — outspoken and opinionated, he had attracted a lot of press coverage.
He also may have been getting tired of taking trips to the Oval Office woodshed
whenever he "misspoke." The prospect of running a $32 billion company must
have seemed an easy matter after what he'd been through. He agreed to Knapp's
proposal. Knapp told Stockman to get Ed Gray's approval. Stockman called
Gray.

"Gome on over, David," Gray said.

Within 30 minutes Stockman had arrived at Gray's office. Gray told us
Stockman said he had talked to Knapp about the FCA job and was interested.
He said he was tired of Washington and wanted to return to the private sector,
and the FCA job was an attractive challenge. Gray listened patiently, thinking
to himself that Knapp must have offered Stockman a lot of money to take the
job and to act as Knapp's mouthpiece. But Gray let Stockman present his case.
Gray's friend and the FHLBB's general counsel. Norm Raiden, sat quietly in a
corner chair. Finally Gray spoke up. Out of curiosity he asked, "How soon
could you leave your job at OMB, David?"

"Five days," Stockman shot back. But Gray had already made up his mind.

"I understand you're a nice man and a quick study, David, but you've never
operated a thrift before. I'm sorry, but I've already lined up Bill Popejoy for the
job.'"^ A half hour after Stockman left Gray's office, James Baker, the president's
chief of staff, phoned and Gray told us he asked angrily:

"Why are you trying to hire Stockman away from us? There's an election
coming up. We need him."

"1 didn't," Gray answered. "He wanted the job and I suggested he forget all
about it." Baker hung up the phone. Later that day Stockman called Gray and
said he didn't want the job anyway. He was going to stay at OMB. (As of early
1989 Knapp had not been charged criminally or civilly in connection with FCA's
huge insolvency. However, FCA's troubles cost the FSLIC over $2 billion and
spawned nearly 1,200 separate lawsuits, many naming Knapp, and he had sued
FCA. By press time about half the suits had been settled, ruled on, or dismissed.)

As Gray mapped his strategy for stopping the abuses at thrifts and dealing
with the damage already done, he realized he could not do the job with regu-
lations alone. He would need help from Congress. He knew he was pushing a
stick into a beehive, but he felt the situation was deteriorating so fast that he
had little choice. To get Congress to act he would have to have public support.

Gray, Stockman, and the Red Baron • 181

so he took his hattic pubhc. In speech after speech Cray attacked some of the
elements he identified as being at tlie root of the indiistr\''s problems. Among
them were: brokered deposits, risky lending, direct investments,'" and inaccurate
appraisals. He proposed restrictions, and he even introduced the idea of a risk-
based premium program that would require individual thrifts to pay special
assessments to the FSLIC if they engaged in risky behavior.

His candor produced a vigorous counterattack in Washington. Gray claimed
Don Regan had the Treasury Department" back a bill in Congress that would
actually further deregulate the thrift industry. Gray was appalled and vigorously
opposed the bill, it was defeated. Score one for Gray.

A short time later. Gray believes, Don Regan exacted his revenge. On
September 13, 1984, Regan spoke on the state of the economy to a convention
of mortgage executives in Washington. At the news conference that followed,
Stan Strachan, editor of the National Thrift News, asked Regan if the Treasury
would guarantee losses at FCA in the event of a run on the company by de-
positors. After all, Strachan reminded Regan, Treasury had done just that a few
years earlier during a run on Continental Illinois bank in Chicago.

"No," Regan shot back. Pressed by Strachan, Regan categorically ruled out
any kind of Treasury backing for FCA. That public statement created exactly
the kind of turmoil Gray had been trying to avoid by moving slowly on the FCA
matter. He had eased Knapp out and Popejoy in with as little fanfare as possible.
So far his strategy had worked — until Don Regan's remarks. The next day there
was a run on FCA and $400 million in deposits walked (or ran) out the door as
customers and deposit brokers rushed to remove their money. It was the largest
one-day run in thrift history, and Ed Gray was furious at Regan. Regan's careless
remarks had been devastating to Gray's FCA rehabilitation program. Gray shot
off an angry letter to Regan, asking him to cheek with the FHLBB the next time
he planned to speak out like that.

Regan replied with an angry letter of his own in which he said, "I was
surprised and frankly displeased by your letter. . . . Candidly, I do not have to
be reminded of my responsibilities in areas of concern to you or, for that matter,
any of the other areas of government in which economics and finance play a
role."

Soon Regan had another opportunity to throw stumbling blocks in Ed Gray's
path. To repair the damage done at FCA by the massive outflow of deposits in
the wake of Regan's remarks. Gray turned to brokered deposits as a quick fix.
Ironically, Gray, the very man who was death on brokered deposits, was now
turning to them to buy time. For help he approached his predecessor at the
Bank Board, Richard Pratt, now an executive with Merrill Lynch, and Pratt
agreed to have Merrill Lynch place $1 billion in deposits with FCA within days.
But he soon called Gray back with the news that he'd been overruled by his
superiors at Merrill Lynch and the deal was off. Gray was forced to raise the

182 • INSIDE JOB

money from other brokerage houses. Later Pratt told Gray privately that Don
Regan had personally intervened at Merrill Lynch to kill the deal. It was almost
as if Regan were taunting Gray for his opposition to brokered deposits. Gray
thought Regan was trying to get back at him for Gray's suggestion that Regan
check with him before commenting publicK about S&'L matters.'- Regan, who
had promised he would not involve himself with matters relating to his former
employer Merrill Lynch after he joined the Reagan cabinet, denied intervening
with Merrill Lynch about the $1 billion in brokered deposits for FCA. Pratt
declined to comment.

After Gray's brokcred-deposit regulation was rejected by a federal court,
which ruled that only Congress could make such a prohibition. Gray decided
that if he couldn't limit brokered deposits, he'd better limit what thrifts did with
those federally insured deposits. At every insolvent S&L, Gray found both ex-
cessive brokered deposits and risky direct investments. In Gray's view thrifts
chartered in states with liberal thrift regulations were using federally insured
deposits to take far too many risks. '^ The thrift industry was turning into a crap
shoot, with the bets insured by the FSLIC. Gray thought that was wrong, and
he made it known that his next move would be to draft new regulations that
would curb direct investments by FSLIC-insured state thrifts''' and limit thrifts'
growth.'^

"It had to stop," he was telling everyone who would listen. S&Ls were
padding their financial statements with too many direct investments that seemed
on the books to be worth millions but whose qualit\' couldn't really be determined
until the project was completed. If the project was a ripoff, no one would know
until it was too late.

Gray had first proposed a new direct investment regulation in May 1984.
In early December 1984, shortly before he actually issued the new regulation.
Gray said Bill O'Gonnell of the U.S. League of Savings Institutions phoned and
pleaded with him not to go through with it.

"If he had been at Gray's office, you can guarantee that O'Gonnell would've
been down on his hands and knees," an aide said later.

O'Gonnell denies he asked Gray to kill the whole regulation, but only to
modify it. Whatever the case. Gray was unmoved.

In January the regulation was finally enacted, to go into effect in March.
In general it would limit direct investments to just 10 percent of a thrift's total
assets,"" and it would also limit a thrift's rate of growth to 25 percent a year.''
Some thrifts had been growing at rates of 100 to 500 percent a year.'*

Gray says that the U.S. League again tried to kill the regulation. O'Gonnell
remembers events differently, repeating that, rather than wanting to kill Gray's
growth restrictions, the League had simply wanted them modified and calling

Gray, Stockman, and the Red Baron • 1 83

Gray's version "overkill." Gray says "nonsense." I Ic believes O'Connell is trying
to rewrite history.

"During the late afternoon of the day before both of these regs [the growth
regulation and the direct investment regulation] were proposed in open hearing
of the Bank Board, Mr. O'Connell called me," Gray recalled. "My recollection
is that the calls came in at around S to 6 p.m. Mr. O'Connell begged me to
not go through with the growth regulation, not to propose it the next day, and
he said if I did so my career would be ruined if 1 ever decided to go back to the
thrift industr\. The call was a long one, as I recall, probably ?0 to 40 minutes.
I told him that if 1 had to be the son-of-a-bitch to do it so be it. It would be
done."

Regarding the direct investment regulation. Gray said it was only after
the regulation was adopted by the Board that the U.S. League "grudgingly"
supported it.

As 1985 dawned it was beginning to appear to Ed Gray in Washington that
Texas was especially out of control. Gray's shorthanded and underpaid examiners
were coming in from the field with stories about Texas thrift owners and managers
that made J. R. Ewing look like a minister. They told Gray about thrift board
meetings attended by hookers whose services were paid for by the thrift, chartered
jet-set parties to Las Vegas, gala excursions to Europe, luxurious yachts, ocean-
front mansions, and Rolls-Royces — princely life-styles built on mountains of
bad loans and bad investments. The state's long-standing liberal thrift and bank-
ing practices, the oil and real estate booms of the late 1970s, and the state's
entrepreneurial, wild-cat business traditions had all combined to make Texas a
hothouse for deregulated thrifts, and the signs of abuse were starting to show.
In the newly deregulated environment new thrifts had sprouted throughout Texas
like rye grass after a spring rain. Old, long-established thrifts were snatched up
by young speculators eager for the opportunity to wheel and deal with insured
deposits. Even out-of-state thrifts, many from California, opened loan offices in
Texas hoping to catch a ride on the Texas wave.

Within a year of Garn-St Germain's passage Texas was embroiled in a
construction-loan feeding frenzy. Acquisition and Development Loans (ADLs)
and Acquisition, Development, and Construction Loans (ADCs), for commer-
cial projects, were the main-line products. Home loans went begging. The
money, in large part, flowed into construction. Yet thrifb were not doing suf-
ficient market surveys to see if the marketplace could absorb the new office
buildings and condos, and they were not coordinating with other thrifts to make
sure they weren't all going to flood the market at the same time with the same
kinds of projects. In Texas in the early 1980s the emphasis was on building,
and the future would take care of itself because the boom would never end.

184 • INSIDE JOB

Building permits in Texas increased from S4. 5 billion in 1976 to about $17
billion in 198'?.

Texas thrifts lived only for today: today's deals, today's profits, today's kick-
backs. By 1985 the Dallas and Houston skylines were filled with what locals
began to refer to as "see-through office buildings." So much commercial con-
struction had been financed by thrifts that it far outstripped the local market
demand, and glass skyscrapers stood empty. There were so many unsold condos
littering Houston and Dallas and their suburbs that a favorite joke among lenders
went: "Whafs the difference between \'.D. and condominiums?" The answer:
"You can get rid of \'.D."

With supply vastly exceeding demand in 1985, many Texas thrifts kept from
going under only by turning more deals and inflating their financial statements
with more fees and up-front interest. Their portfolios became little more than
huge pyramid schemes, Ponzis, that required constant trades, refinancings,
swaps, participations, and loans on yet more new projects. They had to take in
more brokered deposits to fund more loans so it would appear that they were
making more profit, even though the loans were risky (risky loans carried the
potential for the highest profits — and losses). As a result Texas thrifts grew at an
astronomical rate. In 1984 and 1985 they grew three times faster than the national
average.'" As long as the S&Ls could keep pedaling, they wouldn't fall. But
ever\' day that passed they had to pedal faster and faster to maintain the illusion
that they were moving forward. Gra\'s proposed limits on direct investments
and growth were going to be very unpopular with thrift owners in Texas — men
like Don Dixon, who owned Vernon Savings and Loan, headquartered in Dallas.
By 1985 Don Dixon was living like a king, and Gray's new rules threatened his
kingdom.

Don Dixon, his petite blond wife, Dana, clinging tightly to his arm, strode
proudly toward the front of the crowd of 40,000 assembled in the piazza in front
of St. Peter's Basilica in the Vatican. Pope John Paul II, dressed entirely in
white, had just made his weekly Wednesday address in six languages and was
now descending the white throne to mingle with the special guests seated around
the platform.

The Bishop of San Diego, the Reverend Leo T. Maher, was hosting the
Dixons for their personal meeting with the Pope. Dixon was in his late forties.
Expensively dressed, and with collar-length gray curls around a tanned face, he
stood out as a businessman in the crowd of worshipers. He had a drooping
mustache and beady eyes that could look warm and trustworthy or calculating
and condescending. He had the air of a let's-shake-on-it kind of guy.

Dixon noted the grandeur of the 300-year-old piazza surrounded by Gian
Lorenzo Bernini's grand colonnade. It is one of the most awesome places on

Gray, Stockman, and the Red Baron '185

earth, and Dixon noticed that the normally loquacious Dana was uncharacter-
istically silent. As the Pope neared, Dixon, too, felt the uniqueness of the
moment. He was not a Catholic, and he had an arrogant sclf-confidcncc, but
even he could not resist this Pope's stature and personal power.

"I was very well aware of everything 1 said and that I was in the presence of
someone very special," he would later recall.

Pope John Paul II greeted the Dixons with a handshake and his characteristic
off-to-one-side nod. Dixon thanked the Pope for the opportunity to meet with
him and presented him with a gift he had brought for the occasion, a $40,000
Olaf Wieghorst original oil painting of an Indian on horseback, "Night Sentry."
The Pope admired the painting and said it would hang in the Vatican Museum.
Dixon told the Pope how much that meant to him. What Don failed to tell His
Holiness was that the painting was not his to give. He had "borrowed" it from
Vernon Savings and Loan back home.'''

After their stop at the Vatican the Dixons continued their European fling
with visits to Bulgari and Guzzi spas. They stayed at the finest European hotels,
such as the Grosvenor House in London, the Hotel Ritz in Madrid, and the
Bristol Hotel in Paris, and while in the neighborhood they stopped by the Palais
de Margaux in Bordeaux, a chateau Dixon and some partners were converting
into a restaurant and hotel. Then it was time to head for home. The Dixons
made their May 1985 European jaunt in Vernon Savings' tri-jet Falcon 50 and,
regulators later discovered, charged the trip's expenses on Vernon's tab.

Flying into Dallas on the last leg of their trip, the Dixon entourage looked
out of the windows of their private jet at the city where the Dixons had made
their fortune. Dallas, the eighth largest city in the United States, was an exciting
town of soaring glass buildings, wild night spots, and businessmen in gray suits
and cowboy boots. Business had traditionally been done differently in Dallas
than in the rest of the country — on gambling instincts, eternal optimism, and
the myth of the reliability of a Texas man's word. In the early 1980s the brash
city vibrated with the pulse of money being pumped into the local economy
from a booming oil business and mushrooming real estate speculation.

Don and Dana must have enjoyed the view as their private jet swooped
down over North Dallas, a cluster of about 20 high-rise office buildings that had
sprung up 1 5 miles due north of downtown Dallas. North Dallas straddled the
Dallas Tollway just north of its intersection with the LBJ Freeway. It was the
hub of a new Dallas financial center, and Dixon's Vernon Savings and Loan
owned the 1 5-story high rise right in the middle.

There, too, was State Savings and Loan of Lubbock, under the control of
Dixon's friend Tyrell Barker. And Sunbelt Savings and Loan, playfully known
around town as Gunbelt Savings for its quick-draw deals. Sunbelt was run by
Ed McBirney, nicknamed "Fast Eddie" — a man people said was "so smart it
was frightening." McBirney became famous in Dallas for lavish parties filled

186 • INSIDE JOB

with wine, women, and debauchery at places Hke the Dunes Hotel and Casino

in Las Vegas. Near Sunbelt were a host of other entrepreneurial thrifts. North
Dallas was Texas-thrift mecca.

Also in North Dallas was Jason's, the famous restaurant that became a favorite
watering hole for deal makers who flocked to Dallas from around the world. At
Jason's the manager, in desperation, had to co\er some tables with butcher paper
to prevent speculators from scribbling deals on the linen tablecloths. And, finally,
in North Dallas were the swanky homes and condos where many of the S&L
deal-makers (including Dixon, Barker, and McBirney) lived. The setting was
right out of the script for the popular IV nighttime soap opera Dallas, which
was shot on location at the South Fork Ranch about five miles away. North
Dallas buzzed 24 hours a day with the frenetic seven-days-a-week pace of mil-
lionaires chasing their next million. For entrepreneurs in the early 1980s, North
Dallas was where it was at.

The Dixons gathered their belongings as the Vernon Savings jet dropped
down into Addison Municipal Airport (also in North Dallas) where Vernon
Savings kept its fleet of planes. The clerical staff that had accompanied the
Dixons to Europe settled back in their seats for the landing. It had been a tiring
but rewarding trip, and it was good to be home. Europe was terrific, but no
place in the world could quite compare at that time to the brave new world of
Dallas.

Don Dixon was a man in a big hurry and he had made it to the top fast.
Even as a child Dixon had been in a hurry, always looking for ways to cut
corners, always trying to get from here to there in the quickest and easiest way.
He grew up in Vemon, Texas, a small town 1 50 miles northwest of Dallas and
10 miles from the Oklahoma border, and his Type A tendencies had first shown
themselves in high school, where, eager to get on to college, Dixon combined
his junior and senior years so he could graduate a year early. His mother rein-
forced this "go get em " behavior by presenting young Don with a brand-new,
money-green, 1956 T-Bird hvo-seater convertible for graduation. Dixon report-
edly once told a high school friend that his goal was to make so much money
he'd "never be able to put a dent in it. "

From high school Dixon went to Rice Institute in Houston, where he studied
architecture for hvo years. Then he transferred to the University of California
at Los Angeles and began a lifelong love affair with the Pacific beaches of
Southern California. In June 1960 Dixon graduated from UCLA with his degree
in business administration. That same year, o\er a thousand miles away in
Dixon's hometown, R. B. Tanner cut the ribbon to open his little Vernon
Savings and Loan. No one could have imagined how intertwined the hvo dis-
parate launchings would become.

Gray, Stockman, and the Red Baron • 187

Dixon went from college straight to where the money was in those days
— residential development. The year 1960 marked the height of the migration
to the suburbs. Like honeysuckle vines, freeways sprouted from crowded cities
and turned once-flat farm and grazing lands into sprawling residential de-
velopments. The tide was rushing out and Dixon was there to catch the crest
of the wave.

He formed Raldon Homes with an a.ssociate, Raleigh Blakely, and the com-
pany did well until the 1973-74 recession hit. Like most development com-
panies, Raldon depended upon a steady stream of loans to provide the capital
the company needed to buy land and build homes. With the recession the
bottom dropped out of the housing market, and, according to published reports,
Raldon found itself stuck with millions in development loans it could not pay
off. Bankers complained about business cycles but didn't accept them as excuses
for nonpayment, so, in a deal worked out between Raldon and its creditors, "Ral
and Don" were forced to resign.

With Raldon's liabilities off his back, Dixon waited the recession out, and
when the real estate market picked up again, he formed Dondi Construction
(DON Dixon), hi short order he was back on the top of the heap. Hundreds of
homes bearing Dondi's unique signature trademark — Spanish styling topped with
red tile roofs — began to pop up in the suburbs of Dallas. By 1981, at 45 years
of age, Dixon was the head of a large, successful construction company that
employed hundreds of people. He took to wearing gold chains, leather vests,
and open-collared shirts around the office. People often said he reminded them
of entertainer Kenny Rogers. Texas Monthly reported that his office staff handed
out phony $3 bills with Dixon's picture on the front, under which was inscribed
"Chairman of the Bored" and "In Don We Trust. " The reverse side featured a
picture of one of Dondi Construction's homes with the caption, in mock Latin,
"Red Tilebus Roofum."

Dixon was riding high in the saddle when he teamed up with soul mate
Tyrell Barker. Barker was a Northern California builder who had come to
Texas recently when someone reportedly told him, "Hey, come on down
to Dallas. We're making lots of money down here." Barker had already
done very well in California real estate, and even after he moved to Dallas,
government investigators said, he continued to maintain his $1.5 million
home in Hillsborough, an exclusive community 20 miles south of San
Francisco. He had purchased the home from the millionaire Hearst family.
Barker was in his early forties, about three years younger than Dixon. He
was noticeably hyperactive, an energetic workaholic with no family. Friends
said he lived to "do deals. " He was stocky, wore glasses and a mustache,
and he talked a lot — except when he was with Dixon, to whom he defer-
red. He was smart and articulate, a man who had learned to compensate
for a potentially crippling dyslexia that had kept him from graduating from

188 • INSIDE )OB

high school or, he later told a judge, being able to read beyond a third-grade
level.

Both Dixon and Barker were "deal junkies," as one FBI agent later de-
scribed them, but their motivations were slightly different. Dixon had an
appetite for the good life. He liked money and the pleasures it could buy.
Barker, on the other hand, thrilled to the deal-making game and money was
just the way he kept score. Dixon was a showman who enjoyed the parties
and social amenities of his power. Barker was a loner who lived for his job.
But neither of them was e\er satisfied. Dixon and Barker measured themselves
by the Texas oil yardstick of the day, which rated one's personal fortune in
"units," with one unit equaling $100 million. At chic Dallas cocktail parties
each new arrival was sized up in whispered rankings, such as "I hear he's a
four-unit man." Dixon and Barker were "no-unit men," and they wanted to
change that. A partnership Barker formed soon after he came to Texas in
1980 left no doubt where his priorities lay. He called it "MLMQ#1" — Make
Lots of Money Quick #1.

Though Texans traditionally made their money in oil, neither Dixon nor
Barker knew one end of an oil rig from the other so they could not hitch
their wagons to that star. What they did know was development and. through
that, the banking and thrift business. They had also heard about thrift de-
regulation, which had begun in 1980. And while as developers they had
always had to go begging to lenders for money, they knew that if they could
own their own S&L they would have ready access to all the cash (deposits)
they wanted. So if they couldn't pump oil, maybe they could pump something
better — money.

They each decided to buy a savings and loan.

Buying a savings and loan would cost more money than they had on hand,
but Dixon had a close friend who was only too v\ illing to help with the financing.
He had become friends with a wealthy Shreveport, Louisiana, businessman,
Herman K. Beebe. Beebe must have been everything Dixon wanted to become.
He traveled in a chauffeurcd limo and lived on a gracious southern-style plan-
tation estate near Shreveport. He also had homes and businesses in Dallas and
Southern California. Dixon and Beebe had met about five years earlier, and
Dixon had become an unofficial member of the Beebe family. He often visited
Beebe on his Louisiana plantation and the two men frequently traveled together,
playing gin rummy and drinking bourbon on Beebcs plane.

Beebe's flagship company, AMI, Inc. , was an enormous conglomerate whose
primary interests were insurance and nursing homes. One of the products AMI
specialized in was credit life insurance. (Banks making large loans often required
a borrower to take out a life insurance policy in the amount of the loan. If the
borrower died, the insurance would pay off the loan. ) Selling credit life insurance
policies was a lucrative business, and Beebe had built close ties with many Texas

Gray, Stockman, and the Red Baron • 1 89

and Louisiana banks. Dixon was so taken with Beebe that he introduced Tyrell
Barker to him and soon they were a threesome.

"Terr\' and Beebc were on the phone to each other all the time," a friend
said later. When Dixon and Barker decided they wanted to make their move
into the soon-to-be-deregulated thrift industry, Beebe said he'd get them started
by helping to finance their acquisitions.

CHAPTER SIXTEEN

Going Home

Don Dixon and his friend Tyrell Barker each began a search for an established
thrift they could acquire with the minimum of fuss. Herman Beebe had solved
their financing problems — all they had to do was find willing sellers. Barker hit
pay dirt first when he landed State Savings and Loan of Lubbock, Texas. Lubbock
(population 178,500) was a cattle town in West Texas at the center of prime
Texas ranching country, about 300 miles west of Dallas. There 22 local citizens
owned State Savings and Loan, a small, conser\ahve thrift with $65 million in
assets, primarily mortgages on single-family homes. But State/Lubbock was strug-
gling because the interest it had to pay to attract deposits was higher than the
interest it was earning on its 30-year home mortgages. State/Lubbock's owners
were in the throes of a classic 1980-81 thrift squeeze.

With financial backing from Beebe, Barker gained formal control of State/
Lubbock on December 3, 1981. Two weeks after buying State, Barker removed
much of the thrift's management, and regulators later said that from then on
Barker and his attorney, Lawrence B. Vineyard, were in control. (Later Barker
would tell the FBI that Vineyard was the guy who read his paperwork for him,
since Barker, because of his dyslexia, had only a third-grade reading ability.)
Barker wasted no time opening a headquarters office in Dallas, where the action
was, and he bought two corporate planes for State so he could fly back and
forth, even though it cost only $34 to fly from Dallas to Lubbock on a commercial
airline.

Barker later said he felt like a kid in a candy store. His oak-paneled office
was on the first floor of a North Dallas high rise, and outside the sliding glass
doors he had a miniature swimming jxiol built for his two dogs, an English
bulldog and a Labrador retriever, who traveled with him wherever he went.
Inside, he had a bar, a kitchen, and a fireplace, all the comforts of home. He
even had a pull-down bed, just in case. He often entertained customers dressed

190

Going Home ■ 191

in his jogging suit or jeans and suspenders. He worked from 7 a.m. until 11
p.m. Newsweek quoted him as saying his motto was "if 1 re.st, I rust."

Word quickly spread among Dallas speculators, and Barker's waiting room
was soon jammed with developers waiting their turn to pitch projects. Barker's
message to them, some said later, was simple: "You bring the dirt, 1 bring the
money. We split 50-50." The easy money produced a rush of customers eager
to take advantage of Barker's lenient loan policies.

"How do you know what property to buy?" someone reportedly asked a
developer scurrying to get one of Barker's loans.

"Wherever my dog lifts his leg 1 buy that rock and all the acreage around
it," came the reply.

With his friend Tyrell Barker up and running, Don Dixon was searching in
earnest for his place in the sun. That search took him back to his roots in little
Vernon, Texas, where, the same spring Dixon had graduated from college in
California, R. B. Tanner had opened Vernon Savings and Loan. Dixon decided
to ask Tanner if he'd like to sell out to a local boy.

Vernon Savings and Loan, with $82 million in assets and only $90,000 in
delinquent loans, was one of the soundest thrifts in the state. Tanner had run
Vernon since he opened it in 1960 as though every paper clip and rubber band
were hard cash. Friends said he even worked an entire year without a salary just
to improve Vernon's balance sheet. Vernon Savings was his baby and he nurtured
it lovingly. His small, modest office was dominated by a large oil painting of
the First State Bank of Dumas, Texas, the very first bank he had audited as a
young bank examiner in 1937.

Dixon arrived at Tanner's home that spring day wearing humility on his
sleeve. R.B., dressed in shirt, tie, and suspenders, sat across from the stylishly
dressed Dixon and listened to Don talk lovingly about his roots in Vernon. (Later
Mrs. Tanner would recall sadly that Dixon displayed "perfect manners.") Dixon
said he had benefited greatly from his wholesome upbringing there and he wanted
to give something back to the community. He showed Tanner some of the
plaques he had been awarded for his real estate developments. Though R.B.
had not known the Dixon family well, young Don had grown up with the
reputation of someone who would amount to something, so Tanner wasn't
surprised that the successful young developer had the will and means to buy his
savings and loan. But he was surprised at the generosity of Dixon's offer. The
deal: Dixon would pay $5.8 million for Vernon's outstanding shares, $1.2 million
in cash. The balance, Dixon told him, would be secured not only by Vernon
stock but also by a rich business friend of his from Louisiana, Herman K. Beebe.
How could Tanner lose?

Tanner took Dixon's offer to the other Vernon shareholders, who agreed it
was generous, and on January 10, 1982, the deal was done. Don Dixon now
owned Vernon Savings and Loan. Dixon told Tanner and the other board

192 ■ INSIDE JOB

members that he was busy with his construction company and really had no
interest in running Vernon. He asked if they would stay on board. They agreed.
But Tanner was in for a rude awakening.

A month later the Vernon Savings board of directors held their first meeting
since the change of ownership. Dixon did not attend, but he sent word to an
astonished board that he had purchased, with the thrift's money, a $125,000
three-foot-tall bronze sculpture of a squatting Indian. Art was a great investment,
he said, especially Western art, and he wanted the board to rubber-stamp the
purchase. The slack-jawed directors looked around in stunned silence and then
glumly approved the purchase. For the prudent, conservative Tanner, the shock
of this extravagance was too much. He resigned his position on Vernon's board
and went home to reflect, he told us later, upon the man to whom he had sold
his pampered thrift.

Dixon soon forgot any gratitude for his wholesome small-town roots and
promptly moved Vernon's administrative offices to a 1 5-stor>' building in North
Dallas. His business plan for Vernon was to attract brokered deposits and use
them to finance commercial real estate projects (an abrupt departure from Ver-
non's traditional role as a local home lender). Our investigation of Mario Renda
had already tipped us that First United Fund had brokered huge deposits into
Vernon. Some of Renda's former employees (Manning's Se\en Dwarfs) said
Vernon Savings was one of First United Fund's "special deal" institutions (which
meant that in exchange for getting the deposits, Vernon agreed to make loans
to designated borrowers).

Dixon, who was abo\e all a developer, not a banker, could have used some
of that financing too. But he was faced with thrift regulations that prohibited
large loans to "affiliated persons," and by owning all of Vernon's stock Dixon
was about as affiliated as a person could be. Later, regulators said that to get
around that thorny problem he created a complex web of some 50 subsidiary
companies, layered in three tiers, at the apex of which was Dondi Financial
Corporation. Dixon was a controlling owner of Dondi Financial and Dondi
Financial was made controlling owner of Vernon Savings. But Dondi's other
subsidiaries did not own Vernon Savings stock so they could promptly take their
place in line to receive loans from the thrift. Dixon had pulled off a brilliant
Trojan horse maneuver. And once Vernon Savings' money entered Dixon's
maze of subsidiaries, regulators complained, it was rarely seen or heard from
again.'

To run this empire Dixon built a loyal entourage of managers. He refused
to give us his side of the story, but according to court records and federal
regulators, he purchased his employees' loyalty with extravagant perks. Each
head of a subsidiary received a new Mercedes sedan, for example. Offices and
bonus plans were lavish. The result was a go-along, get-along, get-rich-too crew.

Going Home "193

many of whom asked few questions and did wliat they were told. Their loyalty
and cooperation allowed Dixon to enjoy the fruits of this enterprise while ap-
pearing to maintain distance from the day-to-day activities that eventually led
to Vernon's demise. One exception to the go-along was Jack Brenner, who, for
example, was asked to ciieck out some property Vernon Savings had bought in
California. When Brenner called home he told Vernon president Woody Lem-
ons that the property was worthless. It was a "boulder farm," he said.

"Now, Jack, you go look at it again," Brenner .said Lemons told him. "You
go look and tell me if you don't see a Gulf Stream 50 [a top-of-the-line corporate
jet] in that land." Brenner said he realized in a flash that the whole project was
just a way to siphon money out of Vernon and into something quite different,
in this case a very expensive toy.

"I just said, 'Aw the hell with ya,' " Brenner recalled.

In just a few months Dixon converted little country-bumpkin Vernon Savings
into a high-rolling, multitiered corporate conglomerate and for the next four
years he took the S&L for the ride of its life. Vernon Savings had reported assets
of $82.6 million in early 1982. In 1986 it would report assets of $1.3 billion.
Regulators, who had begged entrepreneurs to step in and save the ailing thrift
industry, were delighted. They soon added Vernon Savings to their published
list of "High Performance Associations." Vernon was just one more shining
example of what American business could do when government got out of its
way, they said.

Regulators later charged that Dixon and some senior officers at Vernon
wasted no time turning on Vernon's spigots and directing the money flow in
their direction. Between July 6, 1982, and January 3, 1986, Vernon declared
$22.95 million in dividends, of which Dondi P'inancial Corporation received
$22 million. Thus millions of dollars were transferred from Dixon's regulated
thrift, which had to account to federal and state regulators for every dollar, to
his holding company, Dondi Financial Corporation, where he could use the
money however he chose. But even with his Dondi Financial coffers bulging
with Vernon's money, Dixon seems to have dipped directly from the Vernon
Savings till whenever possible. It appeared that his every need, his every scratched
itch, became a legitimate business expense for Vernon. Regulators later charged
in court that Dixon and his senior officers "wrongly extracted" at least $40 million
from Vernon.

In early 1983, for example, one of Vernon's subsidiaries paid $1.9 million
for a Swiss-style chalet, built of stone, in the exclusive Colorado ski community
of Beaver Creek. The 85 homes at Beaver Creek, nestled in the Rocky Mountains
in prime skiing territory, were stricfly for the rich and powerful. Homeowners

194 ■ INSIDE JOB

were transported to and from flic ski lifts by Beaver Creek's chauffeured linios,
which served hot coffee and doughnuts on the way to the lifts and sparkling
wine on the way back home.

Many of the houses at Beaver Creek, records showed, were built with money
provided by a half dozen go-go Texas thrifts, Vernon among them, and each
S&L made sure it had its own posh retreat there. Western Savings and Loan
owner Jarrett Woods had a $2 million cabin, as did Morton Hopkins, owner of
Commodore Savings of Dallas, and Chuck Wilson, owner of Sandia Savings of
Albuquerque, New Mexico. According to news accounts, Wilson particularly
liked to watch the skiers from his hot tub in his rooftop cupola with its heated
slate floor. Sandia Savings purchased its stone castle retreat, complete with ponds
and towers and waterfall, with a $5 million loan from Vernon.- All four thrifts,
and their management, were inside players in the Texas thrift game, making
loans back and forth to each other, and by 1988 they would all be insolvent or
struggling to survive.

Beaver Creek was fine when Don and Dana were in the mood for snow,
but their first love was Southern California and a $1 million Solano Beach house
just north of San Diego. Dixon's role model, Herman Beebe, had located the
house when, in early 1981, his vacation home at La Costa Resort in Southern
California was being redecorated and he needed a place to stay in the interim.
When Beebe found the Solano Beach house he had Dixon and Barker fly out
west for a look. They liked it and Dixon entered into a lease option on the six-
bedroom, 5,000-square-foot home. Beebe moved in and stayed there until the
renovation of his La Costa house was complete. After Don and Dana Dixon
were married in 1982 (regulators later charged Vernon Savings paid for the
wedding), the Solano Beach home became their favorite hideaway. They com-
muted on Vernon's jet behveen Dallas and California, spending three and four
days a week at Solano Beach. Barker visited on weekends. Dixon had the Solano
Beach house remodeled, and when the work was complete he named two of
the master bedrooms — one the Dixon Suite, the other the Beebe Suite.

Dixon must have realized that deregulation was a gift from Washington,
and what Washington giveth, Washington could taketh away. Vernon needed
a way to show its appreciation and just the item was tied up at a yacht harbor
in Florida. Even the name, High Spirits, was apropos. She was docked in Boca
Raton, Florida, and what a dream boat she was. Built in the late 1920s, she
was 1 12 feet long and she reeked of Gatsby-era charm. Her sleek white hull was
topped by two levels of cabins made of lacquered natural wood. Shining brass
handrails enclosed her promenade and poop decks. Her main parlor was as
spacious and luxurious as the living room of a country manor. Her staterooms
rivaled those of fine old hotel suites. And to cap it all off she was the sister ship
to the presidential yacht. Sequoia. How was that for a political attention getter?
She was a beauty. She was perfect. She was $2.6 million.

Going Home '195

Federal regulators might have found it a bit hard to justify the purchase of
a yacht for a landlocked Dallas thrift, so Vernon executives and customers formed
the High Spirits Limited Partnership. According to the FSLIC, Vernon routed
over $2 million to the "partners" (by overfunding on a $10 million loan to a
San Antonio shopping center, according to the FSLIC),' so they could "buy"
their shares of the partnership. FSLIC claimed that the partners were never
required to make any payments whatsoever and that Dixon in turn used the
High Spirits as though it were his and Vernon Savings' personal flagship.

High Spirits, with its permanent crew of three, became a migratory bird. In
the cold winter months Dixon docked her in Boca Raton. But as soon as the
cherry blossoms were out up north, he had her moved to Washington, D.C.,
where he used her as a floating party platform to wine and dine some of this
country's best-known and most powerful politicians. The bill for flowers alone
was reportedly $800 a day. By far the most frequent sailor on Vernon's yacht
was Representative Tony Coelho, who, according to the captain's log, used High
Spirits almost as often as Dixon. (A four-term congressman from California's
San Joaquin Valley, Coelho had been a fund-raiser par excellence since becom-
ing chairman of the House Democratic Campaign Committee in 1981. After
federal bank examiners discovered that Coelho and the campaign committee
had used the High Spirits for 1 1 political fund-raising events in 1985 and 1986,
Coelho and the committee repaid Vernon $48,450. In 1987 Coelho would
become House majority whip, a position he held until he resigned from Congress
in 1989 rather than face an ethics probe.) Others sailors included Texas Con-
gressmen Jake Pickle (D-Austin) and Jim Chapman (D-Sulphur Springs), Texas
lobbyist Durward Curlee (who reportedly lived on the High Spirits when he was
in Washington),^ and House Majority Leader Jim Wright (D-Texas).

Yachting was all well and good, as far as it went, but rich people, really rich
people, jetted regularly to the Continent. In 1983 off the Dixons flew on a private
chartered jet to Europe. Dixon justified the tour as a business trip because, he
told associates, he and Dana were researching three-star restaurants on the pos-
sibility that Vernon might open a French eatery of its own, maybe in Dallas.
Dixon said he might even hire a famous French chef to run the place. {The
Wall Street Journal reported that in Lyons Paul Bocuse, a well-known French
chef, actually assembled his 12 sous chefs in the restaurant courtyard for Dixon's
review.) Don and Dana hopscotched across Europe from one three-star Michelin
diner to another, eating their way through France. All in all, they sampled seven
different world-class restaurants, in what Dana described in her diary as a "flying
house party ... a gastronomique-fantastique!"

Dana wrote that as they traveled on their comfortable chartered jet, or in
Rolls-Royces, in the company of a group of European socialites, their way was
prepared for them by Philippe Junot, the former playboy-husband of Princess
Caroline of Monaco. He had found his way onto Vernon's payroll as a "con-

196 ■ INSIDE JOB

sultant" for all things European. When the trip was over the Dixons had run
up a $22,000 tab — paid for, said an FHLB examiner, by Vernon Savings, even
though Dixon was neither an officer nor a director of the thrift. Later, responding
to criticism of the trip, Dixon told James O'Shea of the Chicago Tribune, "You
think it's easy eating in three-star restaurants twice a day six days a week? By the
end of a week, you want to spit it [the food] out. "

Aside from the stress of eating in three-star restaurants twice a day, Dixon
had no real complaints about the trip itself, but using a "rent-a-jet" dulled the
gloss a bit, so when he returned he went jet shopping. He wound up with what
regulators would later call "a small air force." hi another apparent effort to keep
frivolous items out of regulatory view, Dixon made a deal with a small company,
Coronado Air, Inc., whereby Vernon Savings loaned Coronado Air the money
to buy the aircraft and Vernon then leased the planes from them. An FHLB
examiner said the first purchase was a Falcon 50, considered the Rolls-Royce
of corporate aircraft. The lease cost Vernon Savings $39,500 a month and
eventually rose to $65,000 a month. Dixon liked the Falcon and quickly made
it his personal aircraft, but that left other Vernon executives facing the disgrace
of commercial air travel. So Vernon loaned another $1.7 million to Coronado
Air, this time for the purchase of a 1978 Lear Jet 35A. Vernon then leased the
aircraft back for $23,125 a month. By 1985 the lease had jumped to $35,000 a
month. Those two jets alone were costing Vernon nearly $100,000 a month by
1985.

But Vernon's many subsidiaries employed many executives. To make certain
none of the loyal troops felt slighted, Vernon bought three airplanes, a Cessna
Citation, a Cessna 414A, and a King Air E-90 long-range twin turbo prop. And
for those short hops to the store, a helicopter. Planes needed pilots, and Vernon
kept six full-time pilots on the payroll in its corporate "ready room" at Addison
Municipal Airport in North Dallas.

Vernon's jets, three of which were baby blue, were rarely idle. The logs of
the Falcon, now in possession of the FSLIC, listed only Don and Dana as
passengers on at least six flights. Also, like the Dixon navy, the Dixon air force
played host to a gaggle of politicians. Among them, according to the logs, were
former President Gerald Ford and his wife, Betty, Vernon's neighbors at Beaver
Creek, who hitched several rides at costs ranging from $6,000 to $1 3.000, Texas
Monthly reported. Other high-flying political guests included Representative Jack
Kemp of New York; Senator Pete Wilson and Congressman-cum-boatswain's
mate Tony Coelho, both from California; Senator Paul Laxalt of Nevada; and
Representative Jim Wright of Texas (later to become speaker of the House).
Dixon's air force was proving a handy alternative to commercial travel for Dixon's
politician friends. (In just three years this fleet of aircraft cost Vernon Savings
$5,574,942.40 to lease and operate, an FHLB examiner later testified.

A review of the people listed on the flight logs of Vernon's jets turned up

Going Home -197

many other names familiar to us: Larry Taggart, former California S&L com-
missioner; Ed Mittlestet, the president of Charles Bazarian's company, CB Fi-
nancial; and Eric Bronk, attorney for Consolidated Savings and Loan's owner
Robert Ferrante/ We were starting to feel right at home at Vernon. It was
becoming clear that whatever the network was that we were piecing together,
Don Dixon had definitely plugged himself and Vernon info it.

One of the Cood Clc Boys' favorite Texas pastimes was hunting, and as a
boy Dixon had particularly enjoyed quail hunting with his dad in West Texas,
so a partnership chipped in $2.4 million for a posh hunting club. The huge
Sugarloaf Lodge sat atop a loaf-shaped mountain about ^0 miles southwest of
Vernon. Suites had magnificent views overlooking a canyon, and hot tubs with
Jacuzzis .soothed the woodsmen's aching muscles.

To the hunting club's armory were added $40,000 worth of handmade Italian
shotguns embellished with gold and silver inlay. But hunting, even with fancy
guns, could be a hit-or-miss proposition, as one guest later recalled, so live quail
were flown in from Illinois the day before the hunt. Their wings were clipped
and tail feathers plucked so they couldn't possibly fly. "Hunters" then stood on
Sugarloaf s sweeping deck, overlooking the canyon, while hired hands crouched
on a ledge below and threw the quail into the air as the guests blasted away. If
a bird survived one volley, it was recycled until someone finally nailed it. A lot
of Illinois quail met an ignoble end at Sugarloaf

Although diverting, skiing at Beaver Creek and shooting plucked quail at
Sugarloaf did not alter Dixon's preference for California and its sunny beaches.
He and Dana threw lavish parties at their Sola no Beach home, mixing with
Southern California's Who's Who, and it wasn't long before Dixon came to the
conclusion that he should become a pillar of the community like other socialites.
He had an office there and some real estate projects in the works. Now he should
contribute to a worthy cause.

After looking for such a cause he finally settled on the University of San
Diego. He wasn't ready to part with money, mind you. Instead he donated
Dondi Financial Corporation stock to the university, and he threw in a written
commitment that, if asked, he would buy the stock back for $3 million cash.
The donation was a stroke of genius. It cost Dixon nothing (and would ultimately
be worth nothing, after Dixon filed for bankruptcy in 1987), but it brought
instant pillardom and covered nearly every conceivable social, political, and
karmic (an important consideration in California) base. Suddenly Dixon was the
darling of USD's influential alumni, who in turn plugged him directly into a
powerful circle of local, state, and federal politicians. Among them was Con-
gressman Bill Lowery (R-San Diego), for whom Dixon promptly threw a $7,000
campaign fund-raiser. He also took L,owery for rides on Vernon's jet and threw
parties for him on the High Spirits. Lowery later told reporters he thought Dixon
himself owned the jet and the yacht, but Dixon charged it all to Vernon Savings.

198 • INSIDE JOB

The congressman reimbursed Dixon, but somehow, according to the FSLIC,
those reimbursements never made their way back to Vernon.

To enhance their enjoyment of the Southern Cahfornia scene, the Dixons
joined the private Moonhght Beach Chib in Encinitas, just north of Solano
Beach. A membership cost them $2, 500. The club wanted to expand and buy
a condo project nearby that the Dixons (and Vernon Sa\ings CEO Woody
Lemons) owned. The Moonlight Beach Club didn't have enough money to buy
the condos from Dixon so regulators said he helped the club raise the cash this
way: When businessmen wanted to borrow money from Vernon, some were
told they first had to join the Moonlight Beach Club. Memberships, for them,
cost $77,500 to $155,000 depending on how large a loan they wanted from
Vernon.

To reward high-performance employees Dixon and Vernon's executive com-
mittee decided to distribute Vernon's booty through a Bean Program, regulators
later alleged in court. Under the Bean Program, "beans" were awarded instead
of bonuses to Vernon executives and employees based on their performance.
Between June 1983 and June 1986, a FSLIC lawsuit revealed, Vernon paid out
$15 million in beans. $10 million of the beans were subsequently redeemed for
cash and Vernon kept $5 million, calling it deferred compensation.

There was a hitch — one that regulators said benefited Dixon at Vernon
Savings' expense. Employees participating in the Bean Program were also re-
quired to buy stock in Dondi Financial Corporation. Dixon would arrange loans
from Vernon for them to buy the stock. (Vernon made over $678,000 in such
loans.) Employees were then required to use part of their bean bonuses to make
the payments on the loans. Buying stock in Dixon's Dondi Financial was what
qualified them to participate in the Bean Program. Eighty employees took part
in the plan, which appeared, in fact, to be simply another scheme to funnel
money from Vernon to Dondi Financial. Ihe plan seems to have helped turn
some of Vernon's top executives into an army of little Jacks ready to climb the
magic beanstalk whenever Dixon snapped his fingers.

By the dawn of 1984 the Vernon Savings of 1982, with its $82 million in
assets, was a distant memory. The thrift now boasted assets of $450 million,
made up of what would later turn out to be a murky stew composed of brokered
deposits, bad loans carried as sound ones on the books, and properties Vernon
carried on its balance sheet at grossly inflated values. Vernon was wildly making
loans without regard to their intrinsic value because the thrift made its money
up front, in large origination fees. The S&L charged up to 5 points for originating
a loan, so on a $100 million loan Vernon immediately "made " up to $5 million.
The thrift also charged 1 percent to 2 percent to renew the loan ever,' six months
(once a year was standard practice in the industry). So what if the borrower later

Going Home "199

defaulted on the loan? Vernon had already made its profit. And who else was
to know? I'he Federal Home Loan Bank Board's $14,0()()-a-year examiners?
Vernon's sophistieated maze of business dealings left those shavetail aceountants
scratching their heads. Besides, the Federal Home Loan Bank for District 9
(Arkansas, Louisiana, Mississippi, New Mexico, Texas), where there were about
300 S&Ls. had just reduced its agents and supervisors from H to 12, in the
spirit of deregulation. It now took up to two years just to schedule an examination
of a thrift, and .some had not been examined in over three years.

Eventually, though, Dixon's ostentatious life-style began to raise questions.
When federal auditors got around to examining Vernon's 1983 books, they
became alarmed by the institution's headlong dive into brokered deposits, helter-
skelter development, and loans to the maze of subsidiaries bearing the mark of
"Dondi. " Bank records show that in August of 1984 regulators forced Vernon's
board to sign a supervisory agreement binding Vernon to strict guidelines. The
feds had no idea what was going on at Vernon because it was all moving too
fast. They wanted to slow things down until they could figure out whether what
they were seeing was the promise of deregulation incarnate or a thrift regulator's
darkest nightmare.

The supervisory agreement was a sobering event to Vernon's board of di-
rectors, who still conducted their board meetings in Vernon, 150 miles from
the Dallas action. All in their sixties and seventies, holdovers from R. B. Tanner's
day, they never really understood Dixon's fast-moving deals so they had to trust
him and his officers to make the right decisions for the thrift. Their confusion
allowed Dixon (who served on the thrift's powerful loan committee, where the
decision was made to approve or disapprove a loan or investment, even though
he was never an officer at Vernon) and his associates to blunt the effect of the
supervisory agreement, as Vernon employees later testified. Deals the board had
never approved were added to the minutes of the board meetings after the
meetings were held. Boilerplate language, designed solely to comply with the
supervisory agreement, was added to the minutes so the directors thought they
were complying. After the board meetings the real minutes and tape recordings
of the board meetings were destroyed in the Dallas office. The board was also
given inaccurate data on the condition of Vernon's loan portfolio, and the list
of delinquent loans submitted to the board of directors was woefully incomplete.
In short, the supervisory agreement apparently was little more than an annoying
roadblock that Dixon and his associates quickly found a detour around. It would
take more than regulatory saber rattling to stop the Don Dixons of Dallas.

Dixon's sidekick, Tyrell Barker, hadn't been idle either. His State Savings
of Lubbock had also mushroomed into a megathrift using brokered deposits,
high-risk lending, direct investments, and — as was later proven in court — fraud-

200 • INSIDE JOB

ulent deals. While federal regulators were focusing on Dixon, Texas state reg-
ulators were wringing their hands over Barker, who was not only looting State
Savings but was branching out and acquiring other thrifts as well. Barker had
bought Brownsfield Savings in Brownsfield, Texas, and Key Savings, located
just outside Denver.*"

Barker had also struck up a friendship with Tom Nevis, 39, the president
of Nevis Industries in Yuba City, California. Nevis Industries described itself in
a corporate profile as "a highly diversified real estate development and agri-
business concern with major holdings throughout California as well as in Ari-
zona, Colorado, Kentucky, Mississippi, Oregon and Nevada.'" The company
reported that its holdings were worth $100 million in 1981 . Tom Nevis sat astride
this megabusiness in an elaborate office with a macho Western motif of stuffed
trophy animals, pictures of Nevis on hunting trips, pictures of Nevis in a bar
riding a mechanical bull.

Nevis Industries had borrowed heavily to acquire this far-flung empire, bel-
lying up, for example, to the troughs of State Federal Savings and Loan of
Corvallis, Oregon. Federal investigators said Nevis walked off with about $81
million in loans in a gross violation of loan limits to a single borrower after
Beverly Hills loan broker Al Yarbrow introduced him to the thrift. (Federal
investigators said State/Corvallis paid Yarbrow $900,000 in commissions for loans
he placed there. Yarbrow was later indicted for one deal in which he took his
commission in the form of an $88,000 white Rolls Royce.) An FSLIC lawsuit
revealed that regulators believed Nevis had participated in defrauding State Sav-
ings of Corvallis by using straw borrowers and cash-for-trash schemes."

U.S. Attorney Lance Caldwell and lone FBI agent Joe Boyer spent nearly
three years piecing together the dozens of mind-numbing deals at State/Corvallis,
which they said could cost the FSLIC over $150 million. As a result of their
work, a grand jury indicted Nevis, \'arbrow, Mitchell Brown, and others on
numerous counts of conspiracy, bank fraud, and mail fraud. Nevis was found
guilty on 28 counts in May 1989. The Yarbrow and Brown trials were pending
as of this writing.

Published reports and regulatory documents indicated that Nevis Indus-
tries had run up an impressive loan tab of at least $8 million at Eureka Federal
Savings and Loan of San Carlos, California, before showing up at State^ and
had borrowed heavily from Fidelity Savings and Loan of New York, Coast
Savings and Loan of San Diego, and American Savings and Loan of Stockton,
California. Nevis's S&L take totaled more than $100 million, law enforce-
ment officials told us.

In 1983 a friend had introduced Nevis to Tyrell Barker, to the mutual benefit
of both men."* For example, regulators said, $8 million of the money Nevis got
from State/Corvallis went to purchase a Texas resort from Barker. And Barker

\

Going Home • 201

helped Nevis with a complex transaction that involved the Sioux City Hilton
(in Sioux Cit\', Iowa), which Nevis had acquired.

The hotel was losing $50,000 a month, but Nevis wanted to sell it at a profit.
To accomplish such a magical maneuver, Barker, records showed, agreed that
State/Lubbock would loan a Georgia company the money to buy the Hilton
from Nevis. Nevis immediately channeled $2 million of the proceeds to a com-
pany called Doc Valley, Inc., that regulators said he controlled. After State/
Lubbock failed and investigators tried to unravel that deal, they couldn't figure
out who owned what. The Georgia company said State/Lubbock (Barker) owned
the Hilton. Barker said, "Hotel? What hotel?" Nevis said Barker owned Doe
Valley. Barker said, "Huh?" Federal investigators dug into Doe Valley's books,
only to discover that they were unauditable. (In 1988 a Texas court ruled in
favor of State Savings/Lubbock and ordered Nevis to repay $11.3 million in
connection with the Sioux City Hilton/Doe Valley case.)

Regulators warned Barker that he had to stop making risky loans and needed
to get the thrift's records in shape. Barker reacted by hiring four auditors to
straighten out the mess at State/Lubbock, but after a look at the books they just
threw their hands up in despair, finding the situation beyond comprehension.
Through it all there was one thing that didn't concern Barker in the least, and
that was the loss that the FSLIC would sustain if it had to close State/Lubbock
and pay off the depositors.

"I bought the institution, and that's what I buy insurance for," he said,
referring to the premiums State/Lubbock paid to the FSLIC. With Barker dis-
playing that kind of cavalier attitude, the next step was probably inevitable. In
May 1984 the regulators kicked him out (though they say they believe he con-
tinued to exercise influence over State/Lubbock until they finally closed the
institution in December 1985). Barker's unceremonious ouster as the president
of State/Lubbock came only two months after Ed Gray in Washington saw the
video of Empire Savings' 1-30 condos (the "Martian landing pads" on the
outskirts of Dallas) and closed Empire Savings. '" The assault on the two major
thrift institutions shocked Texans, and an uneasiness crept into the back rooms
of North Dallas's financial district.

CHAPTER SEVENTEEN

Dark in the Heart of Texas

Slowly, throughout 1984, the regulaton- noose tightened in Texas. Ed Gray
sought support for his regulation that would go into effect March 1985, limiting
direct investments and placing a 25 percent annual growth limit on S&'Ls.
Regulators also began to demand that thrifts acquire more accurate appraisals.
But during the heat of the debate that surrounded these moves, even as it became
increasingly evident that Ed Gray wasn't going to back down, no one would
have guessed a thing was wrong at Vernon Savings and Loan. Vernon looked
great — on paper. Trade journals routinely listed Vernon among the country's
soundest and most profitable institutions, and Vernon itself crowed that it was
the most profitable thrift in America. Vernon looked so hot, in fact, that a month
after California Savings and Loan Commissioner Larr)' Taggart left that post in
January 1985 he went to work for Dixon as a consultant. Taggart had no regrets
for having presided o\er the deregulation of the California thrift industr>', and
he believed Texas thrifts' recent problems were simply caused b>' the downturn
in the oil economy. He viewed with alarm the frantic attempts by his former
friend Ed Gray to tighten S&L regulations. He felt that, as someone who had
been a regulator, he could help the industr\ by lobbying politicians in Wash-
ington to remain steadfast in their commitment to thrift deregulation. And he
set off to do just that.

With Taggart in Washington singing the company song, the High Spirits
docked in Washington keeping politicians happy, and a fleet of planes giving
politicians rides home, Dixon must ha\e felt he had his bases covered and had
little to fear from the lackluster and politically impotent Ed Gray. Dixon con-
tinued to improve his bottom line at Vernon's expense. He decided to abandon
the Solano Beach house in favor of more elaborate quarters down the road in
Del Mar, where he had one of Vernon's subsidiaries buy a luxurious $2 million
home. The house fronted a long expanse of beach. It was two stories, with

202

I

1

Dark in the Heart of Texas • 203

rounded corner windows and verandas overlooking the Pacifie. Tall palms sur-
rounded the porch, and wide steps led to the fine white-sand beach below,

Although the money for the purchase came from Vernon Savings, regulators
said Vernon's board of directors was never consulted. Dixon then set up two
bank accounts at Vernon Savings and filled them with Vernon money, which
he used to pay the $561,874 in living expenses he incurred during liis 18 months
in the Del Mar house. Some of the items paid out of the accounts, according
to regulators, included:

Flowers— $36,780

Pool service — $4,420

Car service— $23,845

Catering— $13,446

Pet services — $386

Graduation Party— $2,408

Telephone— $37,339

Utilities— $29,689

Cable TV— $1,794

Plants— $5,901

Political fund raiser for San Diego Congressman Bill Lowery — $7,238

Miscellaneous— $101,075

Petty cash— $44,095

A bottle of perfume— $1 10

Life was sweet in California and the Dixons spent about 40 percent of their
time at the Del Mar house, where they became known for their gracious dinner
parties and where they kept an extra Rolls-Royce parked in the garage just for
weekend guests. Their West Coast homes also served as a political lobbying
platform for Dixon, who reportedly hosted political figures such as former Texas
Governor John Connally, former Texas Lieutenant Governor Ben Barnes,' and
Edwin Edwards, the colorful governor of Louisiana, among many others.

"It was a real circus," said one who was around at the time. "They had
something going at that house every weekend."

A succession of friends stayed at the Solano Beach house after the Dixons
moved to Del Mar. One of those friends was Charles Bazarian of Oklahoma

204 • INSIDE )OB

Cih'. Fuzzy, we learned, met Dixon in 1985, thanks to loan brokers Al Yarbrow
and Jack Franks, who made the introductions. Once again it was driven home
to us the key role played by loan brokers in this drama, as they scurried around
the country connecting round-heeled bankers with horny borrowers. -

Bazarian became a prominent figure in the Dixon entourage in both Dallas
and Southern California.' Later Bazarian would tell us that for a time Dixon
was a good friend who, he was sure, had never set out purposefully to loot a
savings and loan.

Bazarian did agree, though, that Dixon definitely was a high liver.

"Didn't we ha\e wonderful parties?" he sighed.

Jack Brenner, the contractor employed to manage some of Vernon's Cali-
fornia assets, confirmed the party rumors. "They were always having parties at
that house in California. I went to only one, and we just turned around and
walked out. The house was a maze of hookers," Brenner told a reporter. ''

Later an East Coast banker recalled for us the time Dixon paid his expenses
to fly to San Diego and had a limousine pick him up at the airport.

"We went to that famous Del Mar beach house of his. Dixon was there
with his wife, and there were these women there. I said to Dixon, 'Who are
these women? They are gorgeous honeys. ' Dixon told me, 'These are your dates
for the night, a little female companionship. You might get a little lonely at the
beach house. You might want a little company for the night.'

"I wasn't expecting that. My face turned bright red. I told Dixon, 'Gee, I
was thinking of going back to my room to work on this loan deal.' And the
subject quickly changed to hunting."

Prostitutes became just another perk for Vernon's employees and
customers — sort of human "beans," if you will. Later Vernon's senior vice
president, John V. Hill, would be indicted on a federal felony charge of bank
bribery (he ultimately pleaded guilty to a conspiracy charge and agreed to co-
operate with prosecutors). He was indicted for what the government quaintly
termed giving "a thing of value in excess of $100," making "sexual favors . . .
available to Vernon officers and directors in connection with their ser\ice to
Vernon and to Vernon's owner, Don R. Dixon." Hill admitted he had arranged
for Vernon Savings to hire two Dallas women and up to ten San Diego women
to attend the first and third nights of a three-day celebration during a Vernon
Savings board meeting in Southern California in 1985.'

When Dixon wasn't hosting such affairs he used the Del Mar house to
maintain his status with the Southern California upper crust. But not everyone
invited to the Del Mar mansion liked what he saw. Old Rolls-Royce money
could smell new stretch-limo money a mile away. A wealthy California publisher
recalled later, "My wife and 1 felt very strange about them [the Dixons]. Every-
thing was too lavish, too big. It seemed to us if they were real they wouldn't be
so socially and politically aggressive."

Dark in the Heart of Texas • 205

The Dixoiis decided to make another trek to the Continent. Tliis time Dixon
and tlie httlc lady liit the liigh spots of P'rance, England, and Denmark and
justified this trip by forming a new subsidiary, VernonVest, based in Munich.
Dixon claimed that VernonVest would attract foreign deposits to Vernon, but
records showed all it ever attracted were expense vouchers for the Dixons' trips
abroad.

And still Vernon Savings continued to grow. By 1985 Vernon's assets stood
at a staggering $1 billion. (Brokered deposits made Vernon look better than the
truth would have it.)

just months after their second European tour the Dixons decided the time
was right for another. This trip took form one day when Dixon was chatting
with his new friend, Roman Catholic Bishop of San Diego Leo T. Maher, and
discovered that the bishop and Monsignor 1. Brent Eagen, pastor of Mission
San Diego dc Alaca, were planning a trip to Europe soon. The Dixons were
ready to go again, so they invited the two holy men to ride along with them on
Vernon's Falcon. Thus in May 1985 Maher and Eagen were entertained at
Vernon's expense in Paris, London, and Rome — where they in turn arranged
the Dixons' introduction to the Pope. The trip was charged to Vernon Savings,
and Dixon justified the expense as entertainment for Vernon customers. But
what customers? The bishop and the monsignor? Perhaps the notation was simply
a rare moment of candor by Don and Dana, who most certainly were Vernon's
best customers."

Vernon's records showed that Don and Dana went to Europe again in 1985.
This time they visited Ireland, Great Britain, Switzerland, Italy, Spain, France,
and Denmark. The stated purpose for the trip was to conduct business,^ of
course, but the visible spoils were $489,000 worth of furniture and antiques,
paid for by a Vernon subsidiary but delivered to the Dixons. There was also a
1951 Rolls-Royce Don picked up in London. (Vernon Savings reimbursed the
Dixons over $68,000 for the European trips they made between 1983 and 1985.)*

Don had loved cars since he was a kid, and in May of 1985 he had Vernon
buy Symbolic Motors, a Rolls-Royce and Ferrari dealership in affluent La Jolla,
just south of Del Mar. Rare and expensive autos stood reflected in the polished
tile floors, each car exhibited like a rare gem in its own section of the display
room. Dixon justified the purchase of the dealership by saying that it would
offer Vernon an opportunity to "break into the consumer lending market."

The Dixons had moved from the $1 million Solano Beach house to the $2
million Del Mar house in late 1984, but within months they were ready for
another move up. In 1985 Dixon decided to build a Spanish-style manor house
in the ultraexclusive Rancho Santa Fe subdivision, a few miles inland from Del
Mar in the coastal hills. The land alone, 16 hillside acres, cost Vernon $5
million, regulators complained. The mansion, as he and Dana envisioned it,
would sprawl across five acres like a white stucco Spanish castle. It would have

206 • INSIDE JOB

a six-car garage and a two-stor\' stable. Several man-made waterfalls would grace
tlic grounds. Dana would do the decorating, starting — an PHLB examiner later
charged — with the $489,000 worth of furniture the Dixons had just brought
home from Europe and 514 yards of carpet they ordered for $26,000.

Dixon wasn't alone in his fearless pursuit of the good life. It seemed all
of Dallas was on a roll by 1985 and no one was having more fun than young
Edwin T. McBirney III at Sunbelt Savings and Loan. McBirney was chairman,
CEO, majority shareholder, and ruler of the Sunbelt fiefdom, and Sunbelt
was a star sapphire in the Texas crown of thrift debauchery. While careening
his institution toward staggering losses that culminated with a shortfall of $1.2
billion, the darkly handsome McBirney threw some wild and crazy parties.
Regulators said that in 1984 and 1985 Sunbelt spent over $1.3 million on
Halloween and Christmas parties. One Halloween McBirney entertained at his
palatial North Dallas home dressed as a king. He served broiled lion, antelope,
and pheasant and had a fog machine going for atmosphere. The following
Halloween he expanded to a warehouse that he decorated like a jungle, and
he wore a pith helmet, khakis, and binoculars. And, yes, the elephant was
real — until a magician he had hired made it disappear. That Christmas he
decorated a warehouse like a Russian winter, with strolling Russian peasants
and a bear.

Gifted with a retentive mind and a sharp intelligence, McBirney often had
groups of borrowers in several rooms at one time at Sunbelt Savings' office in
North Dallas. Cigar in hand, he could circulate between rooms and never miss
a nuance or forget a concession. When a deal couldn't be structured traditionally,
"figure a way to paper it" was often his response, observers said. If a borrower
didn't qualify for a loan, find someone to "kiss the paper" for him." More than
one man who had tried to negotiate a deal with McBirney called him a shark.

Sunbelt had seven aircraft, one of which he bought with financing provided
by Don Dixon's Louisiana friend, Herman K. Beebe. McBirney flew business
associates on trips to Las Vegas, Kona, and Capo San Lucas. He liked to gamble,
and associates told the story of the trip to the Dunes in Las Vegas when he bet
$15,000 on one hand of 21 and won. Then he went over to the craps table and
won again. And again.

"It was amazing," said a fellow junketeer. "I couldn't figure out how he
always won."

Sunbelt later sued McBirney, claiming that in three years Sunbelt spent
$61,800 for him on Christmas gifts (including $54,000 at Neiman Marcus),
$15,100 for lodging on trips, $100,000 for meals (including $57,000 at
Jason's — no wonder they didn't mind taking the time to cover his table with
paper so he wouldn't scribble his deals on their tablecloths), $22,000 at the

Dark in the Heart of Texas ■ 207

Texas Stadium, and $70,000 for limousine service. According to several firsthand
accounts, McBirncy produced w horcs for his customers the same way an ordinary
businessman miglit spring for hnich. A visiting developer told us he checked
into his Dallas hotel room and found a hooker sitting on his bed.

"Hello." she said.

"What arc you doing here?" he asked.

"I'm for you," she purred.

Just then the phone rang. It was McBirncy. "Get my little gift?" he asked.

McBirney prowled one of Dallas's hottest night spots, the Rio Room — along
with such jet setters as Sammy Davis, Jr., and Adnan Khashoggi — where $1,000
bar tabs were common and the big sellers were $1 ^0 bottles of champagne. Real
estate night was Thursday, and many a deal was celebrated or even consummated
then. Wheeler Dealers, a 1963 spoof of Texas millionaires that starred James
Garner and Lee Remick, showed up on late-night TV and some thought it was
a perfect parody of the times, 20 years later. Dallas reporter Byron Harris wrote
that a fellow who had been celebrating an especially lucrative deal stumbled out
of the Rio Room into the parking lot and kicked in the door of a Rolls-Royce
just for fun.

Vernon Savings, State/Lubbock, and Sunbelt were only three of dozens of
Texas thrifts running amok at the end of 1985. Deregulation was barely three
years old but the level of greed and corruption at Texas thrifts had reached
biblical proportions. Questions were being raised about Commodore Savings,
Western Savings, Independent American Savings, Sandia Savings, Lamar Sav-
ings, Paris Savings, Midland Savings, Mainland Savings, Stockton Savings,
Summit Savings, Continental Savings, Mercury Savings, Ben Milam Savings —
the list went on and on. Texas was rocking and rolling to the deregulation rag.

"I remember one closing we had," said a real estate salesperson, describing
how they flipped land to raise its value. "It was in the hall of an office building.
The tables were lined all the way down the hall. The investors were lined up
in front of the tables. The loan officers would close one sale and pass the papers
to the next guy. It looked like kids registering for college. If any investor raised
a question, someone would come over and tell them to leave, they were out of
the deal." At the end of the day's flipping, huge loans, based on the inflated
values created by the flip sales, would be taken out on the properties.

Texas was careening out of control, but Ed Gray returned from his Christmas
break in January 1986 refreshed and optimistic that his direct investment reg-
ulation and the limit on growth were bringing excesses like those in Texas to a
halt. He couldn't have been more wrong. In 1986 the lid would blow off the
Texas pressure cooker.

Gray's illusions were shattered when reports from the field in Texas indicated

208 • INSIDE JOB

that the wildcat thrifts had found ways around most of Gray's roadblock regu-
lations and were falling deeper into the morass.

Gray told us later he was surprised to find that the people in charge of
supervising Texas thrifts, Joe Settle at the Dallas Federal Home Loan Bank and
L. Linton Bowman III, the Texas savings and loan commissioner, were more
sympathetic to the Texas thrift owners than to the Federal Home Loan Bank
Board.'" Gray claimed Settle was "too chummy" with the Texas thrift establish-
ment, and he told a congressional subcommittee that under Settle's administra-
tion, supervision of Texas thrifts had been virtually nonexistent. Gray brought
in veteran thrift regulator Roy Green to baby-sit the Dallas district bank, and
he needed someone with top-notch credentials to run Green's sup>er\'isory staff.
Gray's first order of business in 1986 was to get someone with a strong stomach
in that job. Green recommended Washington veteran Joe Selby.

About that time Selby was seriously thinking about quietly slipping into
semiretirement. A Texan by birth, he was thinking about returning to his home
state to look for some light work, or maybe to do some part-time jobs for the
International Monetary Fund. He was 54 years old and had already served 31
of those years as a regulator in the office of the comptroller of the currency. His
forte was the supervision of large national commercial banks.

Gray had met Selby at a luncheon in Boston before Christmas. Gray liked
what he saw and told Selby he'd be delighted to have him in the FHLBB camp
if he ever decided to leave the comptroller's office. From Gray's vantage point
Selby had all the right qualifications for the Texas job. He was a native of
Ganado, Texas, 90 miles west of Houston, so the Texas cowboys couldn't accuse
him of being a Yankee troublemaker. As a teenager he'd worked as a teller in
his father's bank. Then he went on to earn a banking and finance degree from
the University of Texas. His co-workers in the comptroller's office had affec-
tionately nicknamed him "The Great White Father" — a reference to his snowy
white hair. In January, Green visited Selby in his Washington office and asked
him to be executive vice president and head of supervision at the Dallas FHLB.
Selby accepted.

Selby moved to Dallas to assume his FHLB position in May 1986. By that
time the worsening financial condition of the state's oil and real estate economy
was on the front pages almost daily. But the ups and downs of local economies
didn't concern Selby. Such cycles were as perennial as the grass. Anway, he
soon discovered that the problems facing Texas thrifts were rooted in a much
more troubling soil.

It was only about a month after Selby got on the job that he met Don Dixon.
Dixon strolled arrogantly into Selby 's office one Monday morning wearing his
permanent California tan, beige suit, and alligator shoes. Roy Green and Selby
greeted Dixon and asked him what he had on his mind. Green had briefed Selby

Dark in the Heart of Texas • 209

about the deep concerns he had about Vernon, so botli men were shocked when
Dixon confronted them with liis plan. Dixon had lieard all about "the troubles"
the Bank Board was having with insolvent thrifts, and he was there to help them
out. He wanted them to allow \''crnon to absorb about ten ailing thrifts and, in
so doing, create one giant $9 billion superthrift.

Selby later said that he and Green fought to keep a straight face while Dixon
smoothly explained his plan. They thanked him for his concern over the FSLlC's
well-being and told him they'd get back to him. When Dixon left the two men
burst out laughing. Was this guy for real? Ironically, two years later, in 1988,
the Bank Board's own plan for dealing with failed thrifts in Texas would closely
resemble Dixon's plan. Regulators called Dixon's idea crazy. They called theirs
"The Southwest Plan."

Dixon was among the most visible of the ostentatious S&L rogues, and he
justified his good life by pointing to Vernon's profits. But those profits were built
on shifting sand. For example, Vernon had loaned millions to Dondi Residential
Properties, Inc. (DRPl) to build condos all over Dallas and the suburbs. By 1985
DRPI (or "Drippy," as it was called) was stuck with over 700 unsold units
(nicknamed "the Drippies") on which, examiners warned, Vernon faced a po-
tential $11 million loss. But Vernon kept right on loaning and DRPI kept right
on building.

Vernon also made huge loans to favorite developer friends of Dixon's like
Jack Atkinson, who borrowed tens of millions of dollars from Vernon ($56 million
of which went into default, bank records showed). Atkinson owned his own
Gulfstream 50 jet, which Dana Dixon was rumored to prefer because she liked
its gray leather interior.

To keep those loans from going into default, Vernon Savings — and sister
thrifts like State/Lubbock and Sunbelt — made the loans large enough to allow
for an interest reserve that could cover the payments for a year or so. When that
money ran out Vernon renewed the loan. And each time Vernon renewed a
loan it was able to book new loan fees. If examiners were due for a visit, Vernon
officers farmed out ("participated") really bad loans to other, like-minded thrifts
where the loans would be out of sight until the examiners left.

In June 1985 representatives from 19 Texas savings and loans met secretly
in Houston to discuss what mutual actions they could take to keep regulators
off their backs. According to a report in the Houston Pos^ the S&L executives
discussed;

Selling loans ("participations") to other S&Ls to get rid of dead wood
and to avoid Ed Gray's growth limits.

210 • INSIDE JOB

Using straw borrowers to avoid loans-to-one-borrower limits and to avoid
Ed Gray's growth limits.

Selling loans to each other, with agreements to buy them back later.

Sources told the Posf the effect of these actions would have been to "move
bad loans around to hide thcni from regulators and make the S&Ls appear to
be in better financial shape than they actually were. " (Among those attending
the meeting held in Houston were Terry Barker as well as representatives from
Vernon, Western, Lamar, Mainland, and Continental Savings. Of the approx-
imately 19 thrifts represented at the meeting, about 15 would later fail.)"

Even after the loans went into default, thrift officials had ways of postponing
the day of reckoning. When \''crnon officials compiled the thrift's delinquent
loan list for regulators at the end of 1985, for example, they reported $36 million
in delinquent loans. The accurate figure, regulators later learned, was $212
million.

"It was just a big Ponzi .scheme that probably only had four good years in
it to begin with," a Dallas contractor later explained, referring to Texas savings
and loan operations in the early 1980s. Someday, when the loans finally went
into default, a chain reaction would spread the damage from one Texas thrift
to the next and into other states as interlocking loans and participations, buy-
back agreements, and letters of credit all began coming home to roost at once.

Since even the best juggler reaches the limit of how many balls he can keep
in the air at one time, by 1986 no one around Vernon or its subsidiary operations
had a clue as to how many balls they were juggling or where those balls were.
When the balls started hitting the ground like hailstones in a Texas hailstorm,
startled regulators slapped Vernon with a cease-and-desist order that instructed
Vernon Savings to clean up its act. Dixon knew that a cease-and-desist order
was a serious step in a process that led to almost inevitable seizure by the
regulators.

A few days after he got the order in June 1986, Dixon called his employees
together for a party in a hangar at the company's facility at the Addison Municipal
Airport. Employees of Vernon were accustomed to parties at company expense
so they probably didn't find Dixon's sudden party announcement particularly
unusual. They were greeted at the hangar with a full bar and hors d'oeuvres.
After healthy rounds of drinks and small talk among Vernon's baby-blue air
force, Dixon called for everyone's attention.

Employees gathered around their leader, expecting the usual Dixon pep talk.
Instead he shocked them with the news that he would be withdrawing from
active involvement at Vernon. He would still hold control over Vernon's stock
but would not be around the office anymore. Some employees who attended
the party said they greeted Dixon's announcement with a secret sigh of relief

Dark in the Heart of Texas • 211

They hoped that once the colorful Dixon was gone so, too, would be the
regulators.

In the same month McBirney got the same idea, and he resigned as president
of Sunbelt Savings. And the U.S. attorney indicted Terry Barker and his seeing-
eye attorney, Larry Vineyard, for fraud and conspiracy in connection with
an exchange of loans they had made with a banker friend.'- June 1986 marked
the climax of the most dramatic five years in the history of the Texas thrift
industry.

Even these better-late-than-never actions were no match for the harvest of
woe regulators would now face. Events were tumbling out of control in Texas,
and every agency with an interest in what was happening was scrambling to
catch up. In July, Ed Gray rounded up examiners from around the country and
sent a "hit squad" of 250 specially trained examiners into Texas to help the
Dallas FHLB investigate thrifts suspected of being insolvent. But as pressure was
put on the Texas thrift industry by the small army of FHLBB examiners, Gray
and Joe Selby became increasingly unpopular with both crooked thrift owners
and honest ones. The crooks feared exposure and indictment while the straight
thrift owners feared that the write-downs (reductions in the inflated values crooked
thrifts were assigning to their Texas real estate holdings and loan portfolios)
would depreciate the value of everyone's real estate holdings and hurt the in-
nocent as well as the guilty.

In August, Nancy Reagan received an anonymous letter saying that Ed Gray
was a "Nazi" and that the Bank Board was using "gestapo tactics" in its supervision
of Texas thrifts. The president's wife, who was still friendly with Gray, forwarded
the letter to him for his growing collection.

Larry Taggart (Gray's former friend and California savings and loan com-
missioner), working as a lobbyist and consultant for Don Dixon and other thrift
owners," sent an angry six-page letter to White House Chief of Staff Don Regan
with copies to Senator Jake Garn and Representative Doug Barnard. In the letter
Taggart complained bitterly about Gray and his policies. Taggart had broken
with Gray long ago, as he had sided with California's go-go thrifts against Gray's
re-regulation of the industry. They openly feuded in the press. Their relationship
had hit rock bottom when Gray forced Charlie Knapp, a close friend of Taggart's,
out of EGA in August 1984.''' But nothing Taggart had said before compared
with the vitriol of this letter.

Taggart's letter all but demanded that Don Regan kick Gray out of office.
Taggart wrote that "the attitude of the FHLBB and Chairman Gray has been
contrary to that of the Reagan administration." He noted that Gray's regulation
of the industry was "likely to have a very adverse impact on the ability of our
party to raise much needed campaign funds in the upcoming elections. Many

212 • INSIDE JOB

who have been ven' supportive of the Administration arc involved with S&'Ls
which are cither being closed by the Bank Board or threatened with closure ..."
Taggart also stated that Gray's contention that there was widespread fraud oc-
curring at thrifts was not true and that fraud was a factor "at very few of the
thrifts" being closed by the Bank Board. Taggart parroted the Texas thrift industry-
party line . . . any problems the thrift industry was having were due to the
temporary downturn in the state's oil-based economy and Ed Gray's regulations,
not fraud."

Around the time that Taggart's letter reached Washington, Selby testified
before the Bank Board, seeking approval to close Dallas-based Western Savings
and Loan, owned by Jarrett Woods. Board member Don Hovde asked Sclby
whether the mess in Texas was the fault of the economy or the fault of the
people who had run the thrifts down there. Selby didn't have to search for an
answer.

"I think a majority are a result of poor underwriting and basically it
might be said that even if the economy were good, these loans would never be
good."

Selby's straight talk and tough enforcement policies were not winning
him any friends in Texas. Between May 1986, when he went to work at the
Dallas FHLB, and December 1986, the Dallas FHLB placed at least 100
supervisory actions on thrifts. By September constituents' cries of anguish were
ringing in Texas congressmen's ears, and then House Majority Leader Jim Wright
(D-Texas) called Gray over to his office. "■ When Gray and his party arrived he
was surprised to find Congressmen Steve Bartlett (R-Texas), [ohn Bryant (D-
Texas), and Martin Frost (D-Texas) lounging about. Gray felt like he was being
ambushed. He was right.

The meeting, on September 15, lasted almost two hours, though Wright
had to leave unexpectedly after half an hour. The congressmen minced no
words. "Gestapo tactics — bullying examiners — hit squads — Joe Selby's a finan-
cial Rambo — what the hell are you trying to do to Texas?" They all took their
turn beating on Gray, parroting complaints they'd heard from such financial
wizards as Don Dixon, Tyrell Barker, and Ed McBirney. Like a beaten boxer
in the tenth round. Gray absorbed each punch without complaint and tried to
reassure them that the FHLBB was being circumspect and cautious and fair.
Gray said he left the meeting deeply depressed. He was amazed that the con-
gressmen had so little understanding of what the Bank Board was up against in
trying to protect the FSLIG fund.

A few days later Wright'^ called Gray to say that he'd lieen contacted by
fellow Texan Craig Hall, who was having problems renegotiating loans with a
thrift that the Bank Board had taken over, Westwood Savings and Loan in
California."^ Wright asked Gray if he would check into the matter, and he
particularly complained that Scott Schultz, the regulator responsible for West-

Dark in the Heart of Texas '213

wood, was not as "flexible or understanding" as he should be. Gray told Wright
he'd check out the Hall loans and see what all the flap was about.

Hall was a slick young Dallas real estate syndieator who owned one of the
nation's largest private real estate limited partnership firms and was one of the
biggest owners of real estate in Texas. He al.so controlled at least one thrift and
had interests in others. He had been hit hard by the downturn in the Texas
economy and was now stuck with nearly $500 million in syndication loans he
couldn't repay. He claimed that so many of the loans were from S&Ls that if
he went bankrupt, 29 thrifts would immediately be insolvent. Gray asked Bank
Board negotiators to do what they could for Hall, but Gray later noted, "If a
piece of real estate was only worth $1 million and an S&L had it on its books
as having a value of $2 million, then what were we supposed to do? Look the
other way?"

On September 26 Wright tightened the screws. Gray's bill to replenish the
FSLIC fund, seriously depleted after covering so many costly thrift failures, was
scheduled to be considered by the House soon, but Wright removed it from the
calendar. Through scuttlebutt and media reports Gray and his people got what
they later said they considered to be the clear message that Wright would take
care of the FSLIC recapitalization bill (the "recap") when Gray took care of
Hall.

Gray had begun to feel desperate about the recap bill. Almo.st a year earlier
he had realized that the FSLIG would not have enough money to close and
liquidate all the insolvent thrifts that regulators were now identifying. When a
thrift was liquidated all its deposits up to $100,000 each had to be repaid to
depositors, and that money came out of the FSLIC fund. A single medium-
sized thrift liquidation could cost the FSLIC $500 million. There had already
been several, and the fund would soon be running on empfy. It was down to a
reserve of only $2.5 billion to cover deposits of $800 billion in 3,249 S&Ls. At
the time 252 thrifts, with assets of almost $95 billion, were in serious trouble.
If the FSLIC fund did not have enough money to close insolvent thrifts, they
would be left open and continue to lose millions of dollars a month. The specter
of insolvent S&Ls continuing to operate around the country had driven Gray
to propose the recap bill in the spring of 1986. Now the year was almost over
and Gray's apprehension had increased daily.'''

For the sake of the recap bill. Gray decided to replace Schultz at Weshvood
with someone he hoped would be more acceptable to Wright. He selected a
highly respected official from the FHLB in New York ("I felt that I would
not be caving in by asking a person of very high stature in the Federal Home
Loan Bank system to come out and do this, " Gray later explained to a congres-
sional investigator) and instructed him to see if there was any way to justify
restructuring Hall's loans. Schultz's replacement ultimately did agree not to
foreclose on the $200 million in Hall syndication loans at Weshvood Savings,

214 • INSIDE JOB

thereby giving him some breathing room. Wright told the Associated Press that
Gray's action "saved [Hall's] business, saved several S&rLs, and saved the market
from panic."

The move was very unpopular at the FHLBB, however. Replacing an official
in Schultz's position (conservator of an insolvent thrift) just wasn't done. It was
a slap in the face to the KHLBB's enforcement staff, and the Bank Board chief
of staff later said, "We didn't like what we did. . . . [W]e felt terrible about
the choices posed for us and I personally took a great deal of time to torment
over the fact that from our perspective ... we [felt] we crossed a line bcKveen
what we felt was permissible or not. On the other hand . . . there was a very
difficult problem [getting Wright to release the recap bill] that we were trying
to address."

Gray called Wright to report that the Hall matter had been tended to and
asked for a private meeting with the majoritv- leader. Gray had decided that
Wright's problem was that he just didn't understand how the thrift regulatory
business ran, so on October 3 he went to Wright's office to give him what Gray
called a "civics lesson on FSLIC." The meeting lasted about 20 minutes. Gray
told Wright the FSLIC was almost broke.

"We need your support on the recap, " he said.

Wright once again mentioned that people he trusted in Texas were saying
Gray and Selby were acting like the gestapo in dealing with insolvent S&'Ls
down there. Once again Wright likened the FHLBB to the Nazis and added
that Texas examiners were operating like hit squads in his home state. He said
he was afraid the FHLBB would use the extra money from the recap bill to crack
down unfairly on Texas S&rLs and cause needless bankruptcies. Sitting on a
couch in Wright's office. Gray told Wright point-blank, "Whether you like it
or not, there are too many crooks in this business."

In parting, and with an eye toward pr\ing the recap bill loose. Gray told
Wright to let him know if he ever needed anything further. Three days later
Wright released his hold on the recap bill.

On October 10 Wright wrote to Gray saying that he had received a letter
from Scott Mann, chairman of CreditBanc Savings in Austin,-" that detailed
some "very inappropriate actions by regulators." Wright said he'd been hearing
many such complaints since his discussions with Gray had "come to the public's
attention." Wright was especially concerned, he wrote, about Mann's detailed
charges that Selby and other regulators in the FHLB of Dallas had unreasonably
harassed CreditBanc and were threatening to declare the thrift insolvent without
good reason and in spite of an agreement reached between CreditBanc and Texas
Savings and Loan Commissioner Bowman. Mann had complained in his letter
to Wright, "The FHLB of Dallas had become a high-handed adversary of Texas
savings and loan associations and has effectively usurped the authority of the

Dark in the Heart of Texas • 215

Texas Savings and Loan Commissioner to regulate state-chartered institutions
in Texas."

Wright wrote to Gray, "This kind of high-handed and arbitrary attitude can
only create fear, mistrust and a climate of great instabilit>. " He said tlic regulators'
actions, as described by Mann, "would seem clearly outside the realm of ac-
ceptable regulatory behavior. . . . Sonic in the regulatory force seem not to
understand the fundamental principle that it is government's aim and objective
to save legitimate businesses, not to destroy them." Wright later said the letter
was intended as an expression of concern about the Texas S&'L industry as a
whole, not a particular S&L, and was "a very common thing" for a congressman
to send to "a bureaucrat."

This time Gray could not deliver. CreditBanc was too far gone. By the time
Gray wrote back to Wright four months later, after what he called a lengthy
investigation, he reported that CreditBanc was nearly insolvent because of "deep-
seated financial problems, most of which have surfaced since Mr. Mann acquired
control of CreditBanc in July 1985" and as "a direct result of the failure of
[CreditBanc's] management to invest in safe and sound assets." Regulators later
forced Mann to resign and reported CreditBanc had a net worth of minus $216
million.

The political pressure from Texas thrift owners intensified daily. On October
21 Wright hosted a catered luncheon at the Ridglea Country Club in Fort
Worth, arranged by Wright's good friend and business partner Fort Worth
developer George Mallick. The purpose of the get-together was to give about
20 of Wright's S&L constituents a chance to recount directly to the majority
leader the unspeakable things the Bank Board, Joe Selby, and Ed Gray were
doing to their lives. Advance word of the luncheon meeting spread quickly
throughout the Texas thrift community and soon Mallick was besieged with
phone calls from people who wanted to attend. By the time Wright got to the
country club he faced a veritable lynch mob of 1 10 angry Texas S&L executives
and developers.

As lunch got under way each stood and told his or her own horror stories.
They said that Ed Gray and Joe Selby were kicking their teeth in and forcing
them to list their real estate at its true current value rather than at its projected
inflated value. They complained that they were being vilified and accused of
being corrupt. Local sheriffs were being used to escort deposed S&L chiefs out
of their institutions right in front of the whole world. A minister who was building
a nursing home complained that he was almost finished with the project but
couldn't complete the building because S&L regulators had told thrifts to stop
lending to him. After the meeting a Wright aide reported that Wright's office
was besieged with calls from other people in the industry who had heard that
Wright had expressed an interest in their problems.

216 • INSIDE JOB

A week or hvo after the Ridglea meeting, Wright called Gray again.

"Congressman Jim Wright's on the plione for you, Mr. Gray."

Lighting a cigarette. Gray wondered what it would be this time. He took a
deep drag and punched the lighted button on the phone.

This time Wright asked Gray to meet with his friend Tom Gaubert,
who owned Independent American Savings Association in Irving, between
Dallas and Fort Worth, and who was also under the regulators' gun — in January
1986 the Bank Board had banned him from ever operating an FSLIC-insured
thrift.

Scrappy Tom Gaubert reminded many of George C. Scott with a beard. He
had a gruff voice and he smoked cigars, a I'exas-type man's man, a real roll-
up-the-sleeves kind of guy. Gaubert was a tough negotiator. He had been waging
a war against S&L regulators since they had criticized his management of In-
dependent American and his involvement with what appeared to be a land flip
in connection with a loan from Capitol Savings and Loan in Mount Pleasant,
Iowa. He had agreed to resign in December 1984. Independent American had
then continued under the leadership of Gaubert's brother and others until May
1986, when the FHLBB installed a team of its own. But Gaubert went on
fighting for reinstatement. -'

Gaubert told us that he believed most of the troubles he and his friends were
having were because regulators had first encouraged developers to own savings
and loans in the early 1980s to revitalize the industry, and then they suddenly
panicked and switched gears four years later, throwing the industry into a tailspin
by "re-regulating" it. Everything he had done, he said, had been approved by
regulators who had encouraged him every step of the way. It was a familiar
theme. Without exception, virtually every deposed thrift officer we spoke to,
beginning with Erv Hansen at Centennial, claimed that deregulation was a trap,
a trick, that there never had been any real deregulation of the thrift industry,
and that thrifts were in trouble because they believed what regulators had first
told them, only to have the rules changed later and the ground pulled out from
under them. (No doubt much of that was true. In the early 1980s regulators did
encourage many of the behaviors that they later forbade. ) Tom Gaubert made
no secret of his hatred for thrift regulators. In his mahogany-paneled office,
adorned with stuffed birds, he kept a toy shooting gallery where he had tacked
pictures of regulators Ed Gray, Rosemary Stewart (who headed the Bank Board's
enforcement division in Washington), and Roy Green (president of the FHLB
in Dallas).

The Wall Street Journal reported that in 1985 Gaubert had organized a
political action committee for Democratic candidates that raised $101,000
from 66 Texas thrift owners, officers, borrowers, and wives. Donations came
from Gaubert, Dixon, McBirney, other Vernon Savings and Sunbelt Savings

Dark in the Heart of Texas -217

officers, and Dallas developers who had borrowed hundreds of millions of
dollars from the clique of Texas S&Ls. The Wall Street Journal said Sunbelt
Savings may have paid fees to its directors to subsidize their contributions to the
fund.

Besides raising funds for his little thrift owners' defense fund, Gaubert had
other fund-raising positions that gave him even more political pull. In 1986
Gaubert was treasurer of the Democratic Congressional Campaign Committee,
when Representative Tony Coelho was chairman, and in his 12 months as
treasurer he raised $9 million for House candidates, according to Newsweek
magazine." hi 1987 he was chairman of an event that grossed $1 million for
his good friend Representative James Wright, who became speaker of the House
in January 1987.

Gaubert told us, in fact, that it was he who arranged Wright's 1984 flight
from Los Angeles through Dallas to Shreveport and back on the Vernon Savings
jet, a flight that would make headlines a few years later and cause Wright
considerable political embarrassment. Gaubert said he arranged Wright's flight
on the Vernon plane because other transportation was not available on short
notice. He said he had always expected Vernon Savings to bill Wright for the
flight. Wright did not know at the time that he was on a Vernon plane, Gaubert
added.

"Bullshit," said an FBI agent when we told him Gaubert's story.

When it came to being the queen bee of Texas thrift activitists, no one could
hold a candle to Tom Gaubert. And he had a real friend in Jim Wright. When
Wright spoke to Ed Gray on Gaubert's behalf, Wright told Gray he had known
Gaubert for a long time and had total confidence in him. Selby wanted to boot
Gaubert out of Independent American Savings permanently, and Wright com-
plained that Gaubert was being treated unfairly. Gaubert had assured Wright
he had done nothing wrong. Instead, the Bank Board had violated its rules and
abused its authority, Gaubert said. He ridiculed the regulators who removed the
Dixons and McBirneys and then caused even more losses when they themselves
tried to run the S&Ls."

It was highly unusual for a congressman to intervene directly in FHLBB
regulatory matters, as Wright was doing, and it was against Bank Board rules
for Gray to meet with anyone involved in action before the Board, but since
Congress had not yet acted on the recap bill and the bill was therefore still
vulnerable to Wright's displeasure. Gray agreed to meet with Gaubert and listen
to his complaints. For over two hours Gaubert bent Gray's ear. According to
Gray, Gaubert alternately buttered Gray up and evoked Wright's name to remind
Gray who his patron was. Gaubert asked Gray to review Gaubert's removal as
CEO of Independent American. Gray bit his tongue and agreed — for the recap,
he told himself. Gaubert left Gray's office a happy man.^''

218 • INSIDE JOB

Later Gaubert told us that he advised Wright not to pass the recap while
Gray was in office. "I told the Speaker it would be stupid to give Ed Gray $15
billion. He'd just piss it away."-^

Not long after Wright called Gray on behalf of Tom Gaubert, he called
Gray yet again to repeat his concern for the way thrifts in Texas were being
treated. He especially complained to Gray about what he considered to be )oe
Selby's heavy-handed methods. He asked if Gray could get rid of the man. Gray
refused. When reasoning failed him Wright turned to hardball again. He said
he had heard from his people in Texas that Selby was a homosexual and that
he was hiring homosexual lawyers to work for the Federal Home Loan Bank in
Dallas. Again Wright wondered pointedly if Gray couldn't find someone more
suitable for the job.

Gray replied, "I feel he is doing a fine job in Texas and I see no justification
for firing him."

Wright had to call his friends in Texas and tell them he had been unable
to dislodge Selby from his job at the FHLB of Dallas.

Later, when we asked Wright in writing about the above incident, he replied
by having his attorney write to McGraw-Hill, the publisher of this book, and
deny that any such conversation took place. Wright's attorney wrote, "Mr. Wright
does not and would not presume to tell the head of any agency who should be
hired or fired." He wrote that Wright had no specific knowledge concerning
Selby's personal life "and never would express an>' judgments about him without
such knowledge."

The 1989 report of a congressional ethics probe of Speaker Wright, however,
concluded that the conversation did indeed take place. The report noted that
Selby's sexual orientation, whatever it might have been, was "completely irrel-
evant to his qualification for employment in the Federal Home Loan Bank
System." Every credible witness who knew Selby "had only the highest praise
for the man's character and ability " and none believed "the incredible rumor
embraced by Wright" that Selby "had established a ring of homosexual lawyers"
to do the FHLB's super\isory work in Dallas. The report concluded that Wright's
request that Gray get rid of Selby "greatly exceeded the bounds of proper congres-
sional conduct. . . . An attempt to destroy the distinguished career of a dedicated
public servant because of his rumored sexual orientation or because of a wild
accusation hardly reflects creditably on the House. Such an attempt is a direct
violation of House Rule XLIII."

Selby continued to be a particular target of Texas thrift owners, who viewed
him as a colonial governor representing the imperialist power in Washington,
Ed Gray.-*" If Wright had made life hot for Ed Gray in Washington, Wright's
friends in Texas turned Joe Selby's life into a living hell. Soon after Selby returned

Dark in the Heart of Texas ■ 219

from a Washington meeting with the Bank Board, in which he had obtained
approval for the closure of Jarrett Woods's Western Savings and Loan in Dallas,
one of the Dallas FHLB examiners noticed his home phone was not functioning
properly. He unscrewed the mouthpiece and discovered the problem — an elec-
tronic listening device — a bug. Selby knew he had annoyed some powerful
people, but not until now had he imagined how deep those waters were. Selby
wasn't taking any chances. He had his office and the entire supervisory floor
swept for bugs. None were found.

A few weeks later Selby received a call from a Dallas savings and loan
executive whom he respected."

"Joe, can we get together for lunch? I have something I think you should
know, but I don't want to talk about it on the phone."

Over lunch the bank president recounted a strange occurrence.

"I was attending a thrift conference last week and walked in on a meeting
full of Texas savings and loan guys from around town here. I only picked up
the end of the conversation, but I can tell you they were talking about hiring
somebody to kidnap you, Joe."

Selby thought for a moment. If someone had told him that story a few weeks
earlier, he would have considered them nuts, but now, after the phone bug, he
wasn't so sure. "Don't tell me any more. I don't want to hear about it," Selby
told his friend. "I don't even want to know who was at the meeting." Selby said
later he felt like he was in the cross hairs of a rifle scope.

"God, it was an electric atmosphere during those days," Selby told us. "1
feared for my mental and physical health. I was afraid for my own life. There
were bad guys robbing millions from S&Ls. ... I had no idea I'd run into the
crooks I ran into when I got down to Dallas."

CHAPTER EIGHTEEN

The Last Squeezing of the

Grapes

Don Dixon had stepped down at Vernon after the FHLB issued its cease-and-
desist order. He no longer participated in the thrift's day-to-day activities, but
he still controlled Vernon's subsidiary Dondi Financial. Though gone ftoni the
office, his presence continued to be felt in the vault. After clearing out at Vernon,
Don Dixon began to cash in his Southern California empire. Since Vernon
Savings would no longer be paying the bills, something certainly had to be done
with all his homes there: the Solano Beach house, the Del Mar house, and the
Rancho Santa Fe home that he was building. He tried to find someone to buy
the Solano Beach house (the only one of the three that Vernon Savings was not
on the hook for). Jack Atkinson, who regulators said borrowed (with his affiliates)
over $56.2 million from Vernon, told an FHLB examiner he paid the Solano
Beach rent for a while. So did John Riddle, a de\eloper who bank records showed
had borrowed about $10 million from Vernon.

Our old friend Charles Bazarian showed up next, renting the home for
several months during 1986. Bazarian actually made two offers to buy the home
from its owners after Dixon stopped making the monthly payments. In March,
Bazarian offered $1.75 million, and he said Paris Savings and Loan (in North
Dallas around the corner from Vernon Savings) had agreed to finance the pur-
chase. However, Dixon's man Friday in California said Dixon told him the
Bazarian offer was bogus, intended simply to buy time for Dixon.'

Bazarian's heart attack that year sent Dixon scrambling for another "buyer,"
but Bazarian came back in September with another offer, $1.45 million. Paris
Savings backed out of the deal, however, when they read in the National Thrift
hlews that Bazarian had been indicted in September for the Florida Center Bank
scam with Renda and Rapp. Eventually Dixon lost the home.

As for the Del Mar house, in June 1986 Dixon negotiated its sale to a
company owned by Bruce West, another major Vernon borrower. An FSLIC

220

The Last Squeezing of the Grapes -221

lawsuit revealed tiiat Dixon arranged to have Vernon loan West $2.8 million
to buy the house, but first Dixon removed the expensive artwork, for whieh
Vernon had paid $900,000.- After the sale of the Del Mar house the Dixons
continued to occupy it for about six months, paying West's company, Lawton
Industries, $7,100 a month rent. During that time the Dixons abandoned hope
of moving into the Rancho Santa Fe mansion, under construction a few miles
away, and in December 1986 the Dixons moved into a home in nearby Laguna
Beach that was owned by Jack Franks, a California loan broker who would later
be indicted with Tom Nevis at State/Corvallis. '

hi July Dixon held an auction at Symbolic Motors in La Jolla and sold 19
vintage cars. Fight of them belonged to him, he said, including a classic Hispano-
Suiza, a stunning 19iO Duescnberg, and a 1936 Mercedes. Regulators said the
auction grossed $2.3 million, of which Dixon pocketed $1.8 million. Symbolic
Motors paid all the auction fees, and it (and, therefore, Vernon Savings) lost
$204,000 on the auction.

After Dixon withdrew from Vernon Savings, some of his loyal cadre must
have known their days were numbered. In August 1986 they made some stra-
tegic moves for what they apparently hoped would be a clean getaway. Their
bonus and "bean" commissions, over a million dollars of which was being
held in bonus accounts at Vernon Savings, would be forfeited if they quit (or
if the thrift were seized). So, the FSLIC charged, they took out personal loans
in the exact amounts contained in their bonus accounts and never made a
single payment on the loans. In effect, they withdrew the money from their
bonus accounts by defaulting on the loans. Attorneys for the FSLIC would
later tell a federal judge of their amazement at the boldness displayed by the
Vernon executives:

But even as it became increasingly difficult to continue the cover-up and
as the investigator's net began to tighten, the Senior Officers schemed
one last desperate maneuver to divert another $1,211,792 into their own
pockets. . . .

The persistence and boldness of the Senior Officers in putting this last scheme
into effect, after the commencement of a special investigation by the FHLB,
is truly breath-taking.

Appearing later for depositions, in response to the attorney's charges, all of the
senior officers refused to answer questions. (By preSs time, three had been indicted
on bank fraud charges, two of whom had pleaded guilty.)

By December 1986, the dozens of examiners sniffing around in Vernon's
books began to piece together a frightening picture. What emerged was a $1.7
billion financial institution in worse shape than the Alamo after the smoke
cleared. Dead and dying properties and loans littered Vernon's portfolio. Vernon

222 • INSIDE JOB

assets — office buildings, shopping centers, condo projects — hemorrhaged before
their eyes. At the same time new casualties staggered in the door every time the
examiners glanced up. Losses mounted by the hour. Regulators started calling
the thrift "Vermin Savings." Roy Green, president of the Dallas FHLB, told
congressional investigators that Vernon was the worst-run, worst-managed de-
bacle he'd ever seen in the thrift industry.

Vernon Savings had reported a $17 million negative net worth in November
1986. A month later, as examiners got a better handle on the situation, that
figure rose to $350 million. Then regulators discovered that Vemon had sold
more than $449 million in loans to other thrifts, to get the loans off of Vernon's
books, and had promised to buy many of the loans back if the borrowers ever
defaulted. That meant Vernon was still on the hook for those loans, but if
Vernon were ever liquidated by the FSLIC and unable to uphold its end of the
participation agreements, thrifts aro\jnd the country would take direct losses
every time one of the loans they had bought from Vernon turned sour. The
health of a number of S&Ls around the country depended upon Vernon's
survival.

In December 1986 regulators decided to seek a consent-to-merger agreement
from Vernon.'' The agreement would impose certain restrictions on management
and authorize the FSLIC to arrange a merger or sale of the thrift. It also would
give regulators the right to replace Vernon's directors and officers.

Dixon saw control of Vernon Savings slipping away from him, and he didn't
intend to give up his thrift without a fight. He tried to contact Representative
Jim Wright.^ When Wright didn't return his call, he got in touch with Rep-
resentative Tony Coelho and Coelho called Wright's right-hand man John Paul
Mack,*" who got Wright to call Dixon." Wright later told congressional inves-
tigators that Dixon said, "Look, they are getting ready to put me . . . and all
the stockholders completely out of business. ... If I can be given a week, I
have located a source of income, a source of loans, financing in Louisiana . . .
a person who will take over all the nonperforming notes and provide capital to
continue and redo our op)eration here, if they will just give me that time." Dixon
asked Wright to intercede for him with Gray, and near Christmas 1986 Wright
called Gray at home in California.

According to Wright, he said, "Ed. I don't know anything about Vernon
Savings and Loan. I don't know if it's valid or not. I don't know if it's
meritorious. But the man claims he's being kicked out of business. He's got
a week or three or four days that he can save it and avoid foreclosure. Why
don't you look into it?"

Gray told Wright he thought there must be a misunderstanding. Only the

The Last Squeezing of the Crapes • 223

Bank Board could authorize closing an institution and no such authorization
had been given. He agreed to find out what was going on.

Later Gray would lament over the Christmas call: "I have done things as
a results of his [Wright's] calls that 1 would not iiave done and never did
before."

But Gray kept his promise and called Roy Green at the FHLB in Dallas.
Green said regulators planned to seek a consent-to-merger agreement, not a
closing, and Gray and Green called Mack to explain the difference. They told
Mack a eonscnt-to-merger agreement wouldn't affect the Louisiana business-
man's ability to invest in Vernon, and Gray said if there was an investor foolish
enough to commit $300 million to a massively insolvent institution, the Bank
Board uould certainly be interested.

On January 2 the Dallas FHLB received four proposals to invest in Vernon
and rejected them all. In the case of the Louisiana group, it proposed to put up
no cash whatsoever.

Jim Wright was elevated to the post of speaker of the House of Represent-
atives, the third most powerful post in government, in January 1987. Gray's
recap bill then was truly in the hands of a powerful hostile force. Roy Green
and Joe Selby decided to take a crack at Wright next. They knew better than
anyone else what was yet to come in Texas, and they felt Wright had to be made
to understand that their examiners were only doing what needed to be done.
The examiners were not victimizing innocent constituents. Until Wright un-
derstood the situation they felt he would continue to punish the Bank Board by
failing to support the critically needed recap bill. "1 wanted the speaker to
understand exactly what was going on in Texas," Green said. Selby wasn't so
sure the meeting would do any good. Some thought Wright's actions grew more
out of self-interest than out of ignorance of the facts. But Selby reluctantly agreed
to accompany Green.

Ed Gray said he was not invited to attend the February 10 meeting because
Wright didn't want him there. The six who did go included Green, Selby,
and William Black, who was the FSLIG's aggressive young deputy director.
Wright invited his Texas developer friend and partner George Mallick, George's
son Michael, and others to observe the meeting. Wright had asked Mallick
to write a report on the cost of cleaning up all the insolvent S&Ls and the
reasons for the problems, and Mallick was presenting his completed report
today. *" Black later told us he and the other regulators were astounded to see
the Mallicks and the others in the room. He said their presence made it vir-
tually impossible to discuss highly confidential regulatory matters openly with
Wright.

Wright trusted Mallick's views. He and Mallick had been partners since

224 • INSIDE JOB

the 1970s, according to published accounts, and Wright's wife, Betty, received
$18,000 a year as an employee of a firm they jointly owned. A Justice De-
partment official told the Washington Times the relationship between Wright
and the Mallicks appeared to be "a classic gratuities case . . . official acts
prompted by financial favors," and it later became one focus of an ethics probe
of the speaker.

The February 1987 meeting in the speaker's office began with Roy Green
and Joe Selby explaining the serious problems they faced in Texas. Green told
Wright that the innuendos about gcstapo tactics in Texas were nonsense. Reg-
ulators were just doing their jobs.

Wright was unmoved. If they were so smart, Wright wanted to know, why
couldn't the FSLIC handle these problems more creatively? He felt the FSLIC
was forcing thrifts into insolvency by requiring them to take huge write-downs
on property they owned.

"Why can't you guys work out some kind of deals with these people?" Wright
wanted to know.

There's disagreement on just who brought up Vernon at the meeting. Wright
claimed he didn't. Black said he most certainly did, others said Green did. One
thing was clear — Wright was furious with Gray, whom he felt had lied to him
about Vernon.

"When 1 talk to the head of a federal agency and he tells me something,
you know, I believe him," Black quoted Wright as saying. "And 1 asked Gray
when they were going to shut down Vernon Savings and Loan and he personally
assured me that they were not going to do that, and then I discover that you
did just exactly that, and the very [same] day."

Black realized that the speaker just didn't understand the difference between
a consent-to-merger agreement and a seizure.

Black was an articulate, liberal Democrat in his late thirties. A striking man,
with a full head of red hair and a red beard, he was well versed on the FSLIC's
growing crisis. Unlike Gray, there was nothing folksy about Black. He was
professional and blunt.

"You don't seem to understand what's going on down there," Black said to
the speaker.

"1 don't understand what's going on down there? " Wright boomed, his face
turning bright red. "I'm the speaker of the House, goddamn it. Goddamn it, I
listened to you people and now you're going to listen to me. You're talking
semantics to me, jargon, and I don't like it.'"*

Wright complained bitterly that it was Ed Gray who didn't know what he
was doing, especially in Texas. Black, choosing his words more carefiilly this
time, tried to explain to Wright that Vernon was hopelessly insolvent, that it
would cost hundreds of millions of the FSLIG's dollars — maybe as much as a
billion — just to clean up after Don Dixon.

The Last Squeezing of the Grapes • 225

Wright turned to Joe Selby.

"You're the guy who's carrying the big hammer down there. They're scared
of you," Wright said, cocking an angry eye at Selby. Selby wasn't about to get
into a shouting match with Wright, so he just didn't reply. (Friends later said
Selby told them he was afraid of the speaker.) The meeting lasted about an hour,
but Wright remained unmoved and nothing was accomplished. Two weeks after
the meeting, Roy Green threw in the towel and resigned from the Dallas Bank
Board. He later denied that his resignation had anything to do with his meeting
with Wright.

The meeting with Green and Selby was good background for Wright for
what happened six weeks later. On March 27, 1987, the inevitable could be
delayed no longer and the FHLBB ordered that Vernon Savings be closed. When
the extent of the damage at Vernon began to leak out in the press, the seizure
became a major embarrassment to the speaker. His press secretary quickly issued
a statement:

"The Speaker has no personal knowledge one way or other of this or any
other individual savings and loan. . . . The Speaker's aim from the beginning
has been to make sure that depositors are protected and that sound and salvageable
private businesses are not forced into bankruptcy or foreclosure whenever that
can be avoided."

A full-fledged damage-control operation swung into action to protect the
new speaker from himself. Representative Frank Annunzio (D-III)'" rushed to
Wright's side and told the Washington Post, "If this [the closing of Vernon] is
an attempt to embarrass Jim Wright then Mr. Gray is lucky that the Speaker is
an advocate for the homeless because after June, when Mr. Gray is out of a job
(Gray's term as FHLBB chairman was due to expire in June 1987) he may be
sleeping on a grate."

Regulators went on the offensive. They seized thrift after thrift in Texas in
the months that followed the closure of Vernon. But it wasn't the end, not by
a long shot. They began the task of dismantling the rogue thrifts one piece at a
time, dissecting them, like a mortician would dissect a cadaver to determine the
cause of death, reading out the list of maladies and malignancies as they were
found. In Vernon's case the list was a long one, just part of which was a long
list of loans FSLIC compiled that were in default at the time of the takeover.
For us some of the names were familiar ones: John Atkinson and related com-
panies, $56.2 million; Dixon-related companies, $44.9 million; Larry Vineyard,
$16.3 million; John B. Anderson, $11.7 million; John Riddle, $9.7 million;
Tom Gaubert, $6.76 million; Bruce West, $4.85 million; Charles Bazarian and
related companies, $4.6 million; Frank Domingues, $995,000; Durward Curlee,
$502,600; Jack Franks and related entities, $300,000; Tom Nevis, amount un-
specified.

226 ■ INSIDE JOB

In a case where staggering figures and tall tales were the order of the day,
it was hard to pick one figure that summed up Vernon, but if we had to choose
one it would be this; By the time Vernon failed on March 20, 1987, an un-
believable 96 percent of all its outstanding loans were in default. 96 percent!
Virtually every loan Vernon had made was a bad loan."

On April 27, 1987, the FSLIC filed a civil racketeering lawsuit against
Dixon, Dondi F'inancial, and a baker's do7xn of Vernon former officers, charg-
ing that they had looted Vernon of more than $540 million. The suit alleged,
among qther things, that they had made loans of up to $90 million each to
friends and business associates without, the suit said, any "reasonable basis
for concluding the loans were collectible." At the time the civil suit was the
largest in the FSLIC's history. Then regulators faced the long and messy job
of trying to clean up the books, repay depositors, and dispose of Vernon's
overencumbered real estate in a Texas market that had gone bust. Cleaning
up Vernon would ultimately cost $1.3 billion. Later Vernon CEO Woody F.
Lemons was indicted for bank fraud and two of the six senior officers named
in the FSLIC suit pleaded guilty to bank fraud. Spokesmen said the investi-
gation was continuing.

The day after the FSLIC sued Dixon, et al, Speaker Wright and the House
Banking Committee Chairman St Germain did a public about-face and. in what
The New York Times characterized as "a startling reversal," agreed to support
the $15 billion recap bill. Wright later said his sudden decision had nothing to
do with Vernon Savings. He said Secretary of the Treasury James Baker had
met him in Fort Worth on April 24 and personally asked him to support the
$15 billion bill.

While the F'SLIC was filing its half-billion-dollar lawsuit, Dixon was going
into his lame-bird routine and declaring bankruptcy. He claimed to have lost
$100 million and to be fiat broke, and he warned creditors that they "couldn't
get blood out of a turnip. " He estimated his income in 1987 would be a modest
$104,500, compared to $1.9 million in 1986 and $2.9 million in 1985. Dixon
appeared at a bankruptcy court hearing in June 1987 in Southern California
with Dana clinging nervously to his arm. When the judge questioned him about
the extravagant life-style he had led while he controlled Vernon Savings, Dixon
tried to paint a picture of prudence. He left spectators shaking their heads when
he insisted that his Ferrari was not an extravagance.

"It was a family Ferrari," he told the court. How so? Well, he explained,
because it had an automatic transmission. Laughter spread throughout the court-
room. As Dixon answered the bankruptcy court judge's questions, he glanced
out into the audience, where he spotted a familiar face, Dallas reporter Byron

The Last Squeezing of the Grapes ■ 227

Harris, who had closely covered Dixon's rise and fall. Dixon smirked, as if to
say "What a pain in the ass, huh?" Dana, on the other hand, looked terrified
by the whole public spectacle. She held tightly to Don's arm as they sat at the
witness table and afterward in the hall as they passed the phalanx of reporters
and television cameras.

The "family" Ferrari was not the only asset Dixon's 85 creditors wanted to
get their hands on. There were the custom-made shotguns, now valued at
$25,000 apiece, and Dana's $75,000 diamond solitaire ring. And the $31,000
worth of French wines Dixon had picked up on his European tours. All were
listed in the bankruptcy filings.

In an attempt to gauge the depth and breadth of Dixon's five-year spending
binge, his own attorney compiled a list of about 400 people and 1 50 banks and
S&Ls Dixon had done business with ("every one he'd ever driven by," quipped
an associate) who might need to be notified about any action taken in his
bankruptcy case. On the list were many names familiar to us: Larry Vineyard,
Tyrell Barker, Jack Atkinson, former U.S. Secretary of the Treasury John Con-
nally, Ben Barnes (former lieutenant governor of Texas), Robert Ferrante, Jack
Franks, John Riddle, Bruce West, Charles Bazarian and his company, CB
Financial. There were also several familiar savings and loans; Sunbelt, Key,
Paris, and Vernon.

And there on the list was R. B. Tanner, 71, founder of Vernon Savings.
Dixon continued to promise Tanner he would pay him the more than $2 million
that Dixon still owed him for Vernon Savings and that the Tanners had counted
on for their retirement, but it was hard to see where the money would come
from.

"We are hurting terrifically," Mrs. Tanner told us, and R.B.'s health hadn't
been the same since Vernon's collapse. But they found strength through doing
mission work for their church. "R.B. lived a life of integrity," Mrs. Tanner said
proudly, and that was something, at least, that Don Dixon could not take from
them. Months later the Tanners were on television, praying for Don Dixon's
soul.

Bad as things were, Vernon wasn't an exception in Dallas, it was the rule.
FBI officials scoffed at Federal Home Loan Bank Board statements that the
losses were attributable to the oil recession. Vernon, for example, was already
in trouble in 1983, over two years before oil prices collapsed. Government
auditors and Justice Department investigators estimated that there were $15
billion in losses in institutions in the Dallas area that were under criminal
investigation. In Houston half the failed institutions there were under inves-
tigation as well. Every time investigators looked at a failed thrift, they found
fraud.

"My god," an overwhelmed FBI agent said to us, "the only thing that is

228 • INSIDE )OB

ever going to get nie out of here is the statute of limitations." (The statute of
limitations for bank fraud is five years.)

"This is the biggest Keystone Cops debacle to happen to U.S. financial
institutions since the Great Depression," one veteran thrift executive, hired by
the FSLIC to help untangle the mess, told The Wall Street Journal. "I'hc failure
on the regulatory side is even.' bit equal to the failures committed by the other
side. "

"If you know the Vernon story," a FSLIC attorney told us, "you know three
percent of what hapjjened in Texas. "

HUGE FRAUD PROBE OF DALLAS THRIFTS

Thus read newspaper headlines across the United States in mid-August 1987.
The U.S. Department of Justice had convened a special task force of 20 FBI
agents, two assistant U.S. attorneys, four IRS agents, 14 Justice Department
lawyers and special prosecutors, and at least one federal grand jur\'. They seized
the records of about 400 players in the Dallas S&L game, involved in 25 to 35
thrifts, and they announced that the largest white-collar crime probe of its type
in U.S. history was under way. Their investigation, they said, could take from
two to five years to complete.

The Dallas Times Herald obtained a copy of the list of 400 jjeople whose
records had been seized while investigators repeatedly stressed that seizure of
a person's records did not indicate that person himself was under investigation.
On the list were many names familiar to us: Jack Atkinson, Tyrell Barker,
Herman Beebe, Mitchell Brown, Durward Curlee, Don and Dana Dixon, Jack
Franks, Tom Gaubert, Craig Hall, Morton Hopkins, Ed McBirney, Tom
Nevis, John Riddle, Larry Vineyard, Jarrett Woods. The list also included some
heavyweight Texans, including Richard Strauss, the son of Robert Strauss, the
former national Democratic Party chairman; Ben Barnes; John Connally; for-
mer Texas Savings and Loan Commissioner L. Linton Bowman, III; and Gene
Philips, president of Southmark, a $10 billion Dallas-based investment com-
pany. An eerie silence fell over what had been a mecca for wild, free-wheeling
S&L action.

Many suspected the task force investigation was no more than a temporary
inconvenience for Texans. As Molly Ivins, columnist for the Dallas Times
Herald, once said, "When they crap out, Texans are \er\- good-natured about
it and just start over with something else. It's the game they like ..."

Texas differed only in scale from what we had discovered virtually every-
where else in the country, even in places where the only oil being pumped
was at the corner gas station. Texas had attracted almost every swindler in the
country who was traveling the thrift circuit because Texas thrifts wheeled and
dealed like no others in the nation. Texas, we had discovered, was the most

The Last Squeezing of the Grapes • 229

glaring example of how ultraliberal state thrift regulations, coupled with new
federal powers and FSLIC deposit insurance, produced a machine that sucked
in deposits from across the nation and channeled them into a network of excess,
fraud, and corruption the likes of which had no equal in the history of this
nation.

CHAPTER NINETEEN

The Godfather

We had spent several months investigating the Texas savings and loan industry
when a source slipped us a startling document. It was a copy of a series of secret
reports prepared in 1985 for the comptroller of the currency.' The report had
been ordered by the comptroller in order to "determine the breadth of [Herman]
Becbe's influence or control o\cr financial institutions." We knew of Bcebes
involvement in banking through his credit life insurance business. We also knew
he had bankrolled Dixon and Barker when they bought Vernon and State/
Lubbock and he had loaned money to McBirney to buy an airplane for Sunbelt
Savings. But Becbe's interest in financial institutions apparendy went far deeper
than that.

The 22-page report listed over 100 banks and savings and loans that the
comptroller's investigators suspected were either directly or indirectly controlled
by Beebe or over whom he had some kind of influence. Listed among the thrifts
they suspected Beebe of controlling were, of course, Vernon and State/Lubbock.
The report also outlined a complex structure of personal relationships, corporate
shells, and stock partnerships that secretly underlaid ownership of dozens more
institutions throughout Texas, Louisiana, Colorado, California, Mississippi,
Ohio, and Oklahoma. And beneath it all, the report alleged. v\as the guiding
hand of Herman K. Beebe. When we scanned the list of thrifts and banks, we
saw many that we knew had failed or were on the verge of insolvency. Suddenly
Herman Beebe appeared to be in the class of Mario Renda and Charles Bazarian.
If the report was correct, Herman Beebe was a veritable godfather of thrifts and
banks. -

Herman Beebe in 1987 was 60 years old. For over 20 years he had been
quietly manipulating financial institutions for his own benefit and the benefit
of a close-knit circle of influential friends. We learned that Beebe was a business
associate of the most powerful men in Louisiana and Texas, and we heard the

230

The Godfather ■ 231

rumors that he was also associated with one of the Mafia's most powerful god-
fathers, Carlos Marccllo.

His influence in banking circles was so pervasive by the mid-1980s that he
could be connected in some way to almost every dying bank or savings and loan
in Texas and Louisiana, yet few people had ever heard his name — that is until
U.S. Attorney Joe Cage set out to change all that. The confrontation between
)oe Cage and Herman Bccbe was a clash played out in Louisiana courtrooms
between 1985 and 1988. It would match in significance Mike Manning's pursuit
of Mario Renda.

Herman Bccbe grew up in Rapides Parish in central Louisiana. Beebe was
a conuuon name in the Arkansas, Louisiana, and Texas area, and Herman came
from solid rural stock. In 1943 he entered Northwestern State University in
Natchitoches, just a few miles from home, and swept the floors of Caldwell Hall
for his room and board. But World War II intervened, and he had to give up
school for Navy shipboard dutv' in the Pacific. After the war he finished college
at Louisiana State University in Baton Rouge, and the same year, 1949, he
married Mary. They would have four children: Easter Bunny, Pamela, Ruth
Anastasia, and Herman, Jr. Beebe had majored in agricultural education, and
he worked as an assistant county agent in northern Louisiana until called into
the NavT reserves during the Korean War. While in the Navy he decided to sell
insurance when he got out.

In 1956 he moved back to Rapides Parish and within two years he was vice
president of Sa\ings Life Insurance Company in Alexandria (eventually one of
the largest mortgage life insurance companies in Louisiana). In 1961 he started
his own company, investing in motels, mostly Holiday Inns. He originally called
his company American Motel Industries, but gradually his investments spread
from motels to insurance to nursing homes and finally banking. American Motel
Industries became siiuply AMI, Inc. Over the next 25 years he would build
AMI into a multimillion-dollar conglomerate only to see it crumble as U.S.
Attornev Joe Cage probed Beebe's business dealings and bombarded him with
indictments and back-to-back investigations.

Whatever Horatio Alger elements there may have been in Beebe's success
story, investigators said he joined the dark side early. In January 1965 the Se-
curities and Exchange Commission accused Beebe and a partner of withholding
important information when they tried to sell AMI stock.'

Beebe shrugged off the SEC judgment and went right back to building his
empire. Nearly two years later, in October 1966, he made a decision that would
change his life. It would also change the fortunes of more than 100 banks and
thrifts over the next 20 years. In 1966 Herman Beebe bought his first bank,
Bossier Bank & Trust, in Bossier City, Louisiana. As AMI had become the

232 • INSIDE JOB

cornerstone of his business empire, so Bossier Bank & Trust would become the
cornerstone of his banking empire. On a roll, he parlayed that purchase into
eight more banks in Louisiana, Oklahoma, and Texas. Beebe had come up with
a way to create his own captive customer base for his insurance company. By
owning his own banks Beebe could require the banks' prospective borrowers to
buy ami's credit life insurance. No insurance, no loan, though it might not be
so crudely put.

Beebe quickly became one of Louisiana's major employers and a one-man
conglomerate. Soon he was in demand. The mayor of Shreveport, Louisiana,
120 miles northwest of Alexandria, tirelessly wooed him, even attending AMI
board meetings. He urged Beebe to consider the benefits of basing his company
in Shreveport. Beebe agreed — after all. his bank. Bossier Bank &• Trust, was in
Bossier City, a suburb just across the Red River from Shreveport. In 1971 he
made the move. For the next 14 years he would work and live in Shreveport,
200 miles due east of Dallas.

Even as Beebe's star was rising in Louisiana, he was getting some unasked-
for attention outside the state. Two thousand miles away, on the West Coast,
the San Diego police were looking into Beebe's growing contacts there and
notified the Metropolitan Crime Commission in New Orleans. The San Diego
authorities reported that they had discovered that Beebe was negotiating to pur-
chase a casino. His partners in the deal were familiar to the San Diego police,
who considered them undesirables.

About the same time the rumors began to circulate that Beebe was "con-
nected" in some way to Carlos Marcello, the powerful New Orleans Mafia boss.
Among Beebe's growing businesses were his nursing homes. Carlos Marcello
liked nursing homes too. In fact, in 1966 he had been arrested in a New York
restaurant with East Coast Mafia boss Carlo Gambino and Florida boss Santo
Trafficante, and he had told authorities he was in New York to arrange financing
for a nursing home. Aaron Kohn, who was on the Metropolitan Crime Com-
mission at that time, said one of Marcello's "messenger-boy attorneys" was seen
serving as a courier between Marcello and Beebe in the mid- 1 970s. ^ Later Beebe's
attorney would tell us vehemently that Beebe absolutely did not have any as-
sociation with Carlos Marcello or any organized crime figure. "^

Whatever relationships might have been developed imdcrground. Beebe was
forging powerful political connections above ground. In the early 1970s he and
former Texas Lieutenant Governor Ben Barnes develof)ed a complex business
association, the tentacles of which would be found 1 5 years later entwined in
the Texas thrift crisis.

When Ben Barnes was only 22 he was elected to the Texas House of Rep-
resentatives. For 1 1 years he was one of Texas's most up-and-coming young
politicians. In 1968 he was nominated for lieutenant governor and became the
first candidate in Texas history to receive two million votes. He was lieutenant

The Godfather ■ 233

governor from 1968 to 1972, but his political career ended after his name was
involved in a bank and stock fraud scandal.

In 1971 a group of Texas banks were looted by a network of businessmen
who borrowed money from the banks and used it to buy and sell stock from
firms that belonged to Texas businessman Frank Sharp.'' Ben Barnes had owned
stock in one of the companies under investigation by the SEC, according to the
Texas Obsener, and he had had loans at Dallas Bank & Trust, owned by Sharp
(Barnes and Beebe later bought the bank). Though Barnes was never indicted,
the Texas media speculated that his involvement may have raised questions in
the voters' minds. He placed third in the 1972 race for the Democratic guber-
natorial nomination.

In July 1973 Beebe and Barnes began to form banking and insurance as-
sociations,^ and by mid-1976 they controlled or had major influence over 19
banks and savings and loans in Texas and Louisiana.

Dallas, where Beebe's Savings Life had an office, was the center of the pair's
business activity together. They often held their meetings in a North Dallas
apartment, and it was sometime during 1976, Beebe later said, that Ben Barnes
introduced Beebe to aggressive young Dallas developer Don Dixon.

Financially, Beebe and Barnes did very well together. The Dallas Morning
News reported that by 1976 Beebe claimed a net worth of $8.2 million, and
Barnes' prospects had certainly improved — from a net worth of $100,000 when
he left the political arena in 1972 to $5.4 million in 1976. Unnoticed, they
quietly went about the business of amassing a banking and insurance empire.
Unnoticed, that was, until August 29, 1976, when Dallas Morning News re-
porters Earl Golz and Dave McNeely shattered the silence:

PYRAMID SCHEME, UNSECURED LOANS

POSE THREAT TO SEVERAL

STATE BANKS

So read the main headline on the Golz/McNeely series. The lead paragraph
of their story could have run almost unchanged in any Dallas newspaper during
the savings and loan crisis ten years later:

"A multimillion dollar looting of state banks, with links to political figures
and possibly to organized crime, could cause several state banks in Texas to fail
unless severe corrective measures are taken, according to informed sources."

The gist of the stories was that a network of 14 businessmen had borrowed
money to buy Texas banks and thrifts, used those banks and thrifts to get loans
to buy others, and so on, in pyramid fashion. Then, once they had acquired
the institutions, they had used depositors' money to make loans to themselves
and their friends.'* Among the men named in the story were Herman Beebe and
Ben Barnes.

234 • INSIDE JOB

Aside from the financial wheeling and dealing outlined in their Dallas Morn-
ing News scries, Gol/, and McNccly revealed disturbing information about some
of the men in the network they said officials believed were looting state banks."
Beebe, they said, had "drawn the interest of several federal investigative agencies,
which have reported that he has had associations v\ith indi\iduals who have
organized crime coimcctions."

Again the allegation: "One agency has reported that Beebe has had frequent
contact with one of the personal attorneys of reputed New Orleans Mafia boss
Carlos Marcello." And;

"Usually reliable federal sources report that Bossier Bank & Trust is suspected
of being a conduit for funds skimmed by organized crime from Las Vegas
gambling receipts and placed in foreign bank numbered accounts."

Two of the men named in the Morning News series, Carroll Kelly and David
Wylie, would later get financing from Beebe to take o\er Continental Savings
and Loan in Houston, according to court documents. A Houston dentist (who
was a former investor in two thrifts merged to form Continental) said in an
affidavit that one of the men's former partners told him New Orleans Mafia boss
Carlos Marcello controlled Continental Savings through Beebe. '" Officials with
Continental Savings denied the institution had anything to do with anybody in
organized crime. (Continental Savings failed in October 1988.)

Ben Barnes was in Reno, Nevada, negotiating to build a Holiday Inn at
Lake Tahoe, when the 1976 Dallas Morning News series began. He was li\id.
and with great fanfare and bluster ("I am sick and fired of having my personal
business affairs subjected to continuous harassment. My family and I have en-
dured enough persecution from the awesome power of a giant newspaper") he
sued the Morning News for $20 million.

Within a few days Beebe followed with a $12 million suit. But for all their
threats, the cases never came to court. After a lot of jawboning attorneys for the
defense said Barnes and Beebe abandoned their monetary demands in return for
the newspaper's promise that it would not release any of the information it had
collected on them and would seal the files. Barnes told us he did not pursue
his suit because he could not show he had been damaged financially by the
story.

But that was by no means the end of the story. A House subcommittee,"
chaired by Representative Fernand St Germain (D-R.I.), held hearings in San
Antonio later that year (1976) to investigate the closing of Citizens State Bank
in Carrizo Springs and what became known as the rent-a-bank scandal. The
hearings dragged up all the dirt again and added more.'- A former executive
vice president of Citizens State Bank testified at the hearing that an associate
had attended a meeting with Beebe and Harper and later told him "that Beebe
was supposedly connected with the Mafia. " Beebe denied the rumor.

In the documents filed as part of the 1976 congressional hearings was a letter

The Godfather • 235

from loan broker Donald E. Luna to Barnes and Beebe about a loan Luna was
arranging for an associate of theirs. We remembered Don Luna: Ten years after
he wrote this letter to Barnes and Beebe, he would be indieted with Cardaseia
at Flushing Federal for allegedly extorting $1.75 million from a Swiss developer.
(Sometime during those ten years, federal authorities said, Luna had been eon-
victed of running a confidence scam.) Cardaseia was cleared of the charge and
Luna was awaiting trial as this book went to press.

As with the congressional hearings on brokered deposits involving Mario
Renda, the Citizens State Bank hearings in 1976 had virtually no impact. Beebe
continued to build up AML Inc. , from his corporate headquarters in Shrcveport.
But the people of Shrcveport began to notice that Herman Beebe had changed.
In 1979, saying he needed to devote more time to his business, he stepped down
as chairman of the board of Bossier Bank & Trust (though he maintained his
ownership) and seemed to withdraw from the mainstream of daily commerce.
He stopped going to civic and social functions in Shrcveport, and he sank into
the anonymity of corporate AML Inc. He spent his days doing million-dollar
deals concluded in a matter of minutes and sealed with a handshake. His habit
was to rise before dawn and work late.

An associate later described to us Beebe's way of doing business: "He just
kind of walked on the edge of fire, just defying people. He lived by the sword
and he died by the sword. But I don't think he was a crook. I do think he violated
federal banking laws and savings and loan laws, as most people do who do a lot
of creative things, so he was guilty of that, sure."

Beebe adopted a jet-setting life-style, flying out of nearby Shrcveport Mu-
nicipal Airport for business meetings around the country or taking an entourage
by limousine to Dallas, which was a straight three-hour shot west on Interstate
20 from Shrcveport. When he wasn't engrossed in business he was at home with
his family at their private compound near AMI headquarters, a woodsy secluded
colony of stately Southern mansions, pine trees, and vast gracious lawns. Beebe's
home in the family compound was described in the Shrcveport Times as an
n,000-square-foot, $1 million Colonial mansion complete with swimming pool,
tennis courts, and private pond. There were seven bedrooms, 24-karat-gold-leaf
chandeliers from Spain, separate barbecue and smokehouse, bronze-trimmed
winding staircase in the foyer, murals on the dining-room walls, and a six-car
garage. There were also separate, more modest houses for the Beebe children
— in the half-million-dollar range.

Beebe maintained a second home at La Costa Country Club in Southern
California. La Costa was built by Rapp's buddy Moe Dalitz and others in the
mid-1960s with $97 million from the Teamsters Central States Pension Fund.
Beebe had owned property there for 17 years and was an established member

236 • INSIDE JOB

of an important social and business circle." Most notably, Pete Brewton re-
ported in the Houston Post, he was a business partner with Scott Susalla,
whose father, Edward D. "Fast Eddie" Susalla, was a general partner in La
Costa.''' Beebe and Susalla owned a loan brokerage and real estate firm called
TLC (Texas, Louisiana, California). Susalla also worked with Don Dixon on
condo deals in the La Costa area. (In 1985 Scott Susalla would plead guilty
to possession of cocaine in one of the biggest drug busts in Southern Califomia
history. Federal authorities had accused him and about 100 others of imfxirting
a large percentage of Peru's cocaine into the United States. )

But Beebe's primary interests were still in Louisiana and Texas, where he
continued to expand. When Congress announced that it intended to deregulate
thrifts — taking the first step with the Depository Institutions Deregulation and
Monetary Control Act of 1980 — Beebe immediately saw the possibilities. Real
estate in Texas was red-hot, and deregulated thrifts could make more commercial
real estate loans than ever before, with fewer restrichons than ever before. Beebe
began to "diversify," investing in more S&Ls, and he helped his friends do the
same. Word got around that anyone who needed money to get control of a thrift
should see Beebe.

"He was the man," said an FBI agent later. "Herman was the man to see,"
a thrift regulator agreed. Thus, Beebe became known to a handful of the ob-
servant as "the Godfather of Texas Savings and Loans."

Among the authorized visitors to AMI headquarters and the Beebe family
compound during this time was Don Dixon, who had become a close family
friend and with whom Beebe had made several investments, including a Holiday
Inn in Shreveport. Dixon, about ten years younger than Beebe, had adopted
the older man as a paternal role model, even calling Beebe "Papaw." (Some
people would later speculate that Dixon's high-living life-style at Vernon was
just an attempt to outperk his mentor, Papaw.) Dixon brought his friend Tyrell
Barker into the Beebe clan.

Later U.S. Attorney Joe Cage said, "Beebe created Barker and Dixon for his
benefit, their benefit, everybody's benefit but the American taxpayers. " Both Dix-
on's and Barker's thrifts sold Beebe's credit life insurance policies to their borrow-
ers. Beebe's right-hand man at AMI, Dale Anderson, later said that AMI netted
$2. 5 million in two years through Vernon's sales alone. For a time Beebe even
kept a two-room suite in the Vernon Savings building. Anderson explained how it
worked:

"We were very careful about how we worded it. If a borrower said he'd talk
to his own insurance man, we'd say, 'Fine. That's probably where you need to
get your loan.' "

Beebe, Dixon, and Barker also networked with the burgeoning S&L com-
munity in Texas, arranging millions of dollars in loans for themselves, loans
that regulators would later claim weren't always repaid.

The Godfather ■ 237

"Basically it all boiled down to back scratching," said the U.S. attorney who
later prosecuted Barker. Tom Nevis's testimony, about a time when Barker
approached him for a loan, showed how the back scratching worked:

"He (Barker) said, 'You owe me a loan. Try to get me a loan.' ... I never
crossed Barker. . . . Barker was always saying, 'You do this and I'll help you
out.' ... He done a lot of that."''

A deal negotiated with a Beebe-controlled bank or .savings and loan, ac-
cording to former Beebe associates, might work something like this: Someone
who wanted a real estate development loan would be required to borrow more
than he needed and to use the excess as Beebe directed (to pay off a loan that
Beebe owed or that was owed to him, or to buy stock in a Beebe bank). And
once the development was completed, a Beebe associate might buy it with another
(overfunded) loan from a Becbe-controlled institution. The whole process re-
sembled a Ponzi scheme (that could only last as long as real estate values were
climbing).

"What happened was that people who came to us for money had to buy
something," a Beebe associate told the Dallas Morning News.

Beebe built a number of important relationships, each serving a particular
need, each giving Beebe access to an important arena. With Barnes, Beebe was
plugged into old-Texas banking, insurance, and political circles. With Dixon
and Barker, he was part of the wild-'n'-crazy thrift owners of Dallas. "• With
Louisiana Governor Edwin Edwards and Judge Edmund Reggie, Beebe would
gain entry into the highest circles of political power in Louisiana.

Edwin Edwards was an ambitious politician, and beginning in 1954 he would
hold political office in Louisiana for almost 30 years. He started as a city coun-
cilman in Crowley and subsequently served in the Louisiana Senate and the
U.S. House of Representatives. He was governor of the state of Louisiana from
1972 to 1980, took a break for one term, and served again from 1984 to 1988.
Until he lost his bid in 1988 for an unprecedented fourth term as governor, he
had a campaign record of 16-0.

Edwards was a flamboyant gambling man, a self-admitted "proud and ego-
tistical person" who reportedly used to boast that the only way he could lose an
election was "to be caught in bed with either a dead girl or a live boy." He
gambled in Las Vegas under aliases like T. Wong, and U.S. Attorney joe Cage
said Edwards and Beebe traveled together to Las Vegas and Southern California.
For two years during Edwards's four-year sabbatical from the governorship (1980
to 1984) he was on Beebe's payroll, earning $100,000 a year working for AML
(Later Cage would say the accommodation seemed to exhibit "the hallmark of
influence peddling.")

When Edwards was governor of Louisiana his administration became em-

238 • INSIDE JOB

broiled in the federal government's pursuit of Carlos Marcello, boss of the New
Orleans Mafia. In 1981 Charles Roemer, then Edwards's commissioner of ad-
ministration, and Marcello were convicted of federal charges of racketeering.
The prosecution played in court some tap)es they had made in 1979 of Marcello's
conversations with associates. On the tapes Marcello said, "Man, I know better
than you. man, 'bout them politicians. , . . Edmund [referring to Edwin Ed-
wards) and me all right, but I can't see him every day. . . . He's the strongest
sonofabitchin' governor we ever had. He fuck with women and play dice, but
won't drink. How do you like dat?" Edwards's lieutenant governor in 1979 was
James Fitzmorris. Marcello was recorded as saying, "Fitzmorris? All he can do
is ask a favor. He ain't worth a shit.""

Dallas Morning News reporters Bill Lodge and Allen Pusey reported that
at this same time Marcello was a borrower at Beebe-controlled Pontchartrain
State Bank near New Orleans. James McKigney, Pontchartrain's president, j
testified"* that Pontchartrain had lent money to Marcello. Marcello's son Jo-
seph, and several corporations connected with Marcello. McKigney replaced
Beebe as president of Beebe's Bossier Bank & Trust when Beebe resigned in
1979.''* Marcello attorney Anthony J. Graffagnino-" was a director in 1983 of
Sunbelt Life Insurance Co. , which had its headquarters in Beebe's Shreveport
office (another Sunbelt director was Governor Edwards's commissioner of fi-
nancial institutions, who supervised state-chartered banks and savings and
loans).

Edwards' close associate Judge Edmund Reggie was a former Crowley city
judge in the town where Edwards had once practiced law. Some observers felt
Reggie may have been the real power behind Edwards, that it was Reggie who
pulled the governor's strings. He was Edwards's personal attorney, served as
his executive counsel while he was governor, and headed up Edwards's tran-
sition team when he resumed the governorship in 1984. Reggie also was a
close personal friend of Senator Ted Kennedy and had been Louisiana cam-
paign manager of John Kennedy's 1960 campaign.-'

Judge Reggie was a Louisiana power broker. And he was both a banker
and a thrift owner. He owned the National Bank of Bossier City, in the same
Shreveport suburb as Beebe's Bossier Bank & Trust.-- He started Acadia Savings
and Loan in Crowley in 1957 and had been a director ever since. And he
and Beebe owned stock together in several financial institutions. Reggie told
us they had been friends for about 30 years, and they were associates in nursing
homes, insurance companies, and real estate ventures. Investigators for the
comptroller of the currency said several of Judge Reggie's real estate projects
were financed by Beebe banks, and Reggie's banks made loans to Beebe-related
entities.

Herman Beebe had positioned himself at the vortex of each of these separate

The Godfather • 239

but interlocking circles of influence — the Ben Barnes, Dixon/Barker, and Ed-
wards/Reggie axes. By the end of 1981 Bcebe was a man to be reckoned with.
Beebe was prepared to use everything he had learned over the years about banking
and newly deregulated thrifts to build potentially the most powerful and corrupt
banking network ever seen in the U.S.

CHAPTER TWENTY

Beebe Gets Caged

On January 8, 1982 — just two days before Dixon took control at Vernon Savings
in Texas — Joe Cage was sworn in as a U.S. attorney and assigned to the Shreve-
port office. Cage grew up in Monroe, about 100 miles due east of Shreveport
in northern Louisiana, and throughout his high school career he was an out-
standing athlete. When he was a sophomore — in spite of the fact that the school
had no track team — he threw the javelin 203 feet, a U.S. record at the time.
He served a tour of duty in the Marine Corps, returned to college, and at one
time aspired to become an FBI agent. Instead he became a practicing attorney
and spent the next ten years as a prosecutor in U.S. attorneys' offices and in
private practice. In January 1982 President Ronald Reagan appointed him U.S.
attorney, and he and his family moved to Shre\eport.

Through the years Cage had worked on several cases of financial fraud and,
unfortunately for Herman Beebe, he had developed a keen interest in white-
collar crime. He liked to quote a line from an old Woody Guthrie song ("Pretty
Boy Floyd") that went:

As through this world I've rambled, I've seen lots of funny men. Some will
rob you with a six-gun, some with a fountain pen.

Joe Cage was to white-collar swindlers what Elliot Ness was to bootleggers.
It was (and remains) rare to find a U.S. attorney familiar with the ways and
methods of the professional white-collar criminal, their intricate paper trails and
byzantine multimillion-dollar frauds. Untangling the deals is in itself an art,
and explaining them to a jur>' of twelve honest men and women borders on the
miraculous. But Cage found the cases both challenging and fascinating, and
when he moved to Shreveport in 1982 he ran up against the Dr. Moriarity of
his career — Herman K. Beebe.

240

Beebe Gets Caged • 241

When Cage arrived in Slueveport a white-collar fraud case was already in
the early stages. It involved a smooth and wealth) i''reiieli businessman who
lived in Texas, Albert Prevot, who was accused of defrauding the Small Business
Administration by getting SBA loans and then diverting the money to his own
uses. Assigned to work with Cage on the case was KB! Special Agent C Ellis
Blount.

Blount became Cage's indispensable right-hand man. He had a background
in business law and shared Cage's interest in white-collar crime. They actually
liked the challenge of wading through thousands of documents to piece together
complex business transactions designed specifically to leave a cold trail. They
developed a close working relationship, and eventually the two of them together
would bring down the Beebe empire.

Cage and Blount worked through the months on the Prevot case, and as
they tightened the screws Prevot decided to try to make a deal. He offered to
tell Cage what he knew about Shreveport businessman Herman Beebe, who
was, he said, involved in all kinds of illegal activities. Cage said he was interested,
and by September 1982 he had two plea agreements in the Prevot case and
enough information about Beebe's affairs to justify empaneling a federal grand
jury. What Cage had stumbled onto was Beebe's maze of business relationships
with banks and corporations, hi November, Cage convened the grand jury and
he and Blount went to work unraveling Beebe's tangled affairs for the jurors.

"We'd have, say, 10 issues, trying to get them resolved with the grand jury,
and in solving those 10, 15 more would come up," Cage told us later. It was
like trying to nail jelly to the wall. Beebe's business deals were five dimensional.
They went in every direction, and in every direction Cage said he saw transactions
that worried him. He discovered that many banks and thrifts in Louisiana and
surrounding states had participations and take-out agreements (interlocking fi-
nancial arrangements) with Beebe's Bossier Bank & Trust, and Cage began to
fear for the integrity — and safety — of the area's banking system. Cage and Blount
alone handled all the grand jury documents, all the witnesses. They worked
long hours, determined to get to the bottom of the complicated case. As Cage
called witnesses to testify before the grand jury, word of the investigation trickled
back to Beebe. Cradually, tension grew in the Beebe camp.

At first Beebe just tried to shrug it off. 1983 should have been one of the
best years of his life. He was flush with what seemed like an endless supply of
money from numerous financial institutions, institutions whose owners or of-
ficers were in place because Herman Beebe had put them there. He embarked
upon an expansion program. In April he broke ground on a $12 million seven-
story glass office building in his AMI complex that became known around town
as the AMI Tower. Shreveport people called it an ivory tower because it was
"out in the middle of nowhere." On the top floor were four palatial offices, one
at each corner, where Beebe and his top echelon of officers directed a fast-paced

242 • INSIDE JOB

operation that employed almost 6,000 people, over 1,000 of whom lived and
worked in the Shreveport area. AMI had 17 subsidiaries and eonnections with

14 other companies, with after-tax income of over $4 million and assets of $155
million.

In March 1984 a mutual friend arranged for Beebe"s now ex-wife, Mar>-, to
visit the Reagans at their Santa Barbara ranch, near her own second home in
Santa Barbara, and the public relations blitz was on. The Shreveport Times ran
a full-page article in March 1984, most of it a fawning account of her visit
written by Mary, along with pictures of her standing with President Ronald
Reagan and Mrs. Reagan at their ranch. It made its point — Beebe had friends
who had friends in verv' high places.

Across town from the AMI Tower, in a plain comer office on the third floor
of the Federal Building,' Cage and Blount were spending hundreds of hours
combing through evidence and laying their trap. Cage became so convinced
that Beebe was a danger to the banking and thrift community that he personally
conducted the Beebe investigation. The grand jury was meeting once a week in
Alexandria, over 100 miles south of Shreveport, so Cage was absent from his
Shreveport office for days at a time. Under his personal direction the grand jun.'
heard 1 50 witnesses and stayed in session for two years. Cage and Blount me-
thodically formed a cordon around Beebe and AMI, and then they closed in
step by step. On Halloween 1984, Beebe was indicted, along with three AMI
officers and the CEO of Bossier Bank & Trust. They were charged with 21
counts of fraud.

Beebe was accused of having an AMI subsidiary illegally borrow $1 million
from the Small Business Administration in a series of complex transactions that
had taken place on New Year's Eve 1980. He was also accused of having Bossier
Bank & Trust loan $1.85 million to Albert Prevot (the French businessman
whose plea agreement spawned the empaneling of the Beebe grand jur>'), who
then passed it through four corporations and on to AMI, thus allowing Beebe
to avoid regulations against banks making loans to their owners. In response to
a defense motion the judge separated the charges into Kvo trials — the SBA case
and the Bossier Bank case.

Beebe maintained an ominous silence in the wake of the indictments, but
AMI, Inc., came out swinging, releasing a strong statement in defense of the
five accused men.

"They [the accusations) are the product of an investigation by a U.S. attorney
and an FBI agent who for more than t\vo years have demonstrated the desire to
obtain an indictment at any cost." The accuseds' high-powered defense team of

1 5 attorneys included flamboyant attorney Richard "Racehorse" Haynes of Hous-
ton and Camille Gravel, who was one of Louisiana's leading criminal defense
lawyers, an advisor to Governor Edwin Edwards and Judge Reggie's best friend.

The Beebe children, who had heretofore stayed out of the public eye, fell

Beebe Gets Caged ■ 243

in behind their father. Though the children were grown and Mary and Herman
were divorced, the Beebes remained a close family. Beebe's son, Herman, Jr.,
and Beebe's two sons-in-law worked for him. Throughout the two-year grand
jury investigation, they had all believed it would come to nothing.

"I am a human being and 1 make a lot of mistakes," daughter Pam told
reporters, "and my daddy does, too, but I know he would never set out to harm
or deceive somebody or take anything that didn't belong to him."

Daughter Easter Bunny's husband, David, was one of the accused (though
charges against him were later dropped).

"It was almost comical," said Bunny in her Louisiana drawl, "to think David
could be indicted. Anybody who knows David would think, 'not sweet little
David.' We are just thankful Camille [Gravel, defense attorney] was available.
He is the kindest, most caring person. We must have looked to him like two
little lost lambs."

Many of the 1,000-plus AMI employees in Shreveport took personal offense
at the attack on their employer. They held prayer meetings in the AMI Tower
and turned out at important times to show support for their boss. The grumbling
against Cage had begun.

"The ones [AMI employees] I've talked to," said an employee, "wondered
what Mr. Cage has against our boss. It seems so personal, like a vendetta. We
wondered why the government is spending so much money to go after one man. "

When the first trial began in January 1985, Beebe's family and friends,
including ex-wife Mary, faithfully took their places on wooden benches in the
courtroom at the Federal Building in Shreveport. During breaks they huddled
in small groups, speaking in quiet tones, exchanging subdued smiles, obviously
under tremendous strain. Outside the courtroom the whole town of Shreveport
waited to see what would happen to one of Shreveport's best-known citizens.

Within a few days the prosecution and the defense rested their cases and
the judge sent the jury out to deliberate. On January 17, 1985, the jurors came
back in with a verdict. All eyes in the standing-room-only courtroom were on
Judge Tom Stagg when at 1:10 p.m. he read the jury's decision: Guilty. The
jury had found Beebe guilty of the overall charge of defrauding the SBA. They
did not find him guilty, however, of several specific charges of lying or benefiting
from the loans. Beebe was sentenced to 200 hours community service and ordered
to pay a $21,000 fine and $1 million in restitution.

With hardly time to catch their breaths, the attorneys, defendants, family,
friends, and reporters gathered on February 4 in a courtroom in Lafayette,
Louisiana, 200 miles south of Shreveport. There the second half of the trial,
dealing with the Bossier Bank charges, was to be held. Cage charged that Beebe
had defrauded his Bossier Bank & Trust by having the bank make a loan to
Albert Prevot that was secretly routed to AMI. Cage said the purpose of the
transaction, which took place on New Year's Eve 1980, was to improve the looks

244 • INSIDE )OB

of ami's balance sheet at the end of the year. Then Becbe returned the money,
\ia Prevot, to Bossier Bank. Beebe was again represented b\ Caniille Gravel, a
distinguished white-haired Southern gentleman who sounded like a Baptist
preacher in the courtroom.

"Herman Beebe is a builder," thundered Gravel, "the kind of man that has
helped to build this country. He has risen from the red clay hills of north
Louisiana to the position he now occupies as a leader of the business commu-
nity. . . . Any conviction of any of the defendants in this case carries with it a
life sentence. Mr. Beebe's career as a prominent and successful businessman
would be over. The blight of a conviction would stain him for the rest of his
life."

Gravel told the jury that whatever loans Mr. Beebe received were in the
course of legitimate business. The loans had all been repaid. Besides, what was
illegal about trying to make your financial statement look better at the end of
the year? Where was the harm?

Cage was unmoved. "It wasn't a legitimate loan, merely a true and classic
sham loan to a person who agreed to do a favor."

But this time Cage did not prevail. It took the jury 50 minutes to acquit
Beebe of all charges. They just could not believe Beebe had intended to defraud
his own bank. When Judge Tom Stagg read the verdict the courtroom erupted
in shouts of joy. Beebe seemed stunned and declined comment, but Mary Beebe
said emotionally, "I'm so grateful. I don't know what to say. I really am so
thankful. So grateful to God, so grateful to the lawyers and the judge and so
grateful to the jury. " Someone in the background yelled about a phone call to
the governor. Smiling supporters hugged each other and pumped e\ery friendly
hand. A disappointed Joe Cage led his team from the courtroom without a word.
The score stood even at one-to-one. Cage went back to his office, and he and
Blount started all over again, spreading out the deals, looking at the connections,
following the money. Three months later, on June 4, Cage convened a second
grand jury to investigate Herman Beebe.

Cage's onslaught took its toll on Beebe. He began to have difficulty finding
jjeople willing to do business with him. He was a convicted felon — convicted
of loan fraud. He found it increasingly difficult to borrow money. His name,
and the names of his companies, became like red flags when a bank examiner
found them on a list of loans. Many of the officials of the 200 to 300 banks and
savings and loans that he typically did business with were called to tcstifv' before
the grand jury, and many of them decided Beebe was just too hot to handle.
They stopped associating with him.

Beebe, a man who had lived a very private life in recent years, suddenly
found himself and his business affairs laid open to public view, "My company
was leveraged, like so many companies are," he explained to Shreveport Times
reporter Linda Farrar. "And the turn the investigation took just cut my credit

Beebe Gets Caged ■ 245

off totally. I had no choice but to start liquidating. I just had so much bad
publicity ... it had just prctt\' well done away with my opportunity to make a
living. ... It just went downhill in a hell of a hurry."

Loss of insurance business was especially difficult for Beebe to sustain because
it had been an important source for the cash flow his other businesses required.
He began what appeared to be a liquidation of the Beebe empire. Eventually
financial institutions, even those with ties to Beebe, were forced to foreclose on
most of his holdings (including the AMI Tower), and he sold whatever was not
mortgaged to the hilt. But federal investigators said he had put many of his assets
into his children's names, and they believed he continued to control still more
investments through third parties.

Cage and Blount proceeded to prepare the new case against Beebe. Their
investigation drew the attention of other federal agencies. Two conferences were
held, in Baton Rouge, Louisiana, and Memphis, Tennessee, between federal
prosecutors and state and federal regulators, and between April and June 1985
the comptroller of the currency prepared the series of secret reports on Beebe's
banking activities that first clued us in to the scope of Beebe's influence. After
we obtained a copy of the reports, federal officials told us that while the docu-
ments might contain minor errors, they stood behind them as a fair and accurate
assessment of Beebe's influence in banking and savings and loan circles in 1985.
Compiled independently of Cage's investigation, the reports revealed 12 national
banks that could "in some way be controlled or influenced by Beebe." Key Beebe
figures at those banks included Edmund Reggie and Don Dixon, the reports
said. Listed, too, was Harvey McLean, who owned Palmer National Bank in
Washington, D.C., and who had a multimillion-dollar line of credit at Bossier
Bank & Trust. McLean was also a director of Paris Savings and Loan, which
Dixon associates had said was Dixon's "junk S&L."

The comptroller of the currency report then listed 1 3 national banks that
Beebe might "exert some influence over." Listed as being the link between Beebe
and some of these banks were Ed McBirney (owner of Sunbelt Savings), Jarrett
Woods (owner of Western Savings),- Carroll Kelly (part of the network exposed
by the failure of Citizens State Bank in 1976 and now an owner of Continental
Savings in Houston), and Tyrell Barker.

The OCC study listed 55 state banks (in Arkansas, Florida, Louisiana, Mis-
sissippi, and Texas) and 29 savings and loans (in Colorado, California, Louisiana,
Mississippi, Ohio, Oklahoma, and Texas) "controlled by Beebe and his asso-
ciates. ..." Among the S&Ls listed were Key, Continental, Mercury, Paris,
State/Lubbock, Sunbelt, Vernon, and Western. Among the people mentioned
as a Beebe-bank associate was Rex Cauble, described in the report as "a convicted
dmg dealer [who] has had massive debt at Bossier Bank & Trust." Cauble owed
two other Beebe-related banks $1.5 million and owned stock in two others. (See
Appendix A for full, unedited OCC report.)

246 • INSIDE JOB

One hundred and nine banks and thrifts had been pinpointed by the comp-
troller of the currency's investigators as having a tight enough relationship with
Beebe to be worthy of serious concern. The report so worried the comptroller
that it was brought to the attention of Attorney General Ed Meese, the FSLIC,
and the P'DIC at a joint meeting of tlie Justice Department's new Bank Fraud
Working Group. They realized that with Beebe's extended network of influence,
he could shift fraudulent deals not only from institution to institution but from
regulatory system to regulatory system — which would make him almost impos-
sible to stop. A loan he wanted to hide could be structured through federally
regulated or state-regulated thrifts, banks, and insurance companies all over the
country.

The information in the OCC report would not have startled U.S. Attorney
Joe Cage and FBI Special Agent Ellis Blount had they known of it, but it was
not shared with them. On their own they forged steadily ahead, presenting
documents, evidence, and witnesses to the second Beebe grand jury.

Joe Cage's hot breath got to be too much for Beebe and suddenly in late

1985 he packed up and moved from Shreveport to Dallas to start a new life.
"I left town," Beebe said later, "because the atmosphere was such that I just

felt like it would be very difficult to — " He interrupted himself and then con-
tinued, "It's not difficult for me to make a living. I could make a living on the
Sahara Desert. But I had to get to an atmosphere that was at least better than
where I was."

Beebe started life in Dallas on a high note by marrying his girlfriend from
Shreveport. Ostensibly, they were building a new life together from scratch, and

1986 was a hard year to get started. S&Ls were dropping like flies — that summer
Dixon resigned from Vernon, McBirney resigned from Sunbelt, and Barker was
indicted — and the atmosphere in North Dallas, where Beebe had an office, was
one of deepening gloom. The runaway real estate development craze had resulted
in such a glut that shopping centers and condos stood vacant all over town.
Dallas had about 38 million square feet of unused office space (equivalent to
17 Empire State Buildings). Dallas reporter Byron Harris said of 1986, "The
silence of deals not being made was deafening." Still Beebe somehow always
seemed to have money. With his empire in shambles, where was he getting it?

"If you're interested in Beebe, you should be interested in Southmark," a
source told us one day. "Have you seen the transcripts of Southmark's casino
licensing hearings in Las Vegas? I think you'd find them interesting."

We had found this Dallas-based company in some of our other thrift in-
vestigations. Now we were to learn that Southmark had made nearly $30 million
in loans to Beebe (and Beebe related companies) after his conviction. Altogether,
Southmark conducted nearly $90 million in business deals with Beebe. Some

Beebe Gets Caged • 247

of tlie business was paid for in Southmark stock. 'I'lie company's 1985 10-K
showed that Herman Beebe held nearly 62 percent of Southmark's Series E
Preferred stock. (FSLIC later charged that Beebe used some of that stock to pay
off a loan he had at Edmund Reggie's Acadia Savings and Loan.)

Southmark was a "Forbes 500" company based in Dallas and run by Gene
Phillips, a calculating, tough negotiator, described by competitors as one of the
most astute real estate men in the country. He was of medium height and build,
sandy-colored hair, not particularly imposing. But he took a hard-nosed, struc-
tured approach to deals that awed people on the other side of the negohating
table. Phillips was a chemical engineer who had been bitten by the real estate
bug. BusinessWeek reported that in 1973, when Phillips was 35, he had dealt
his way right into bankruptcy in South Carolina. To pay off his debts he went
to work for one of his larger creditors and later bought the company. In 1978
he tried to buy a bank in Georgia, but the comptroller of the currency blocked
the purchase because Phillips, he said, had not told the truth on his application.
But, true to form. Phillips still made $2 million on a $4 million investment
when he sold the bank shares he had bought before his application was denied.

Then in 1979 he and his partner. New York city attorney William Friedman,
began to buy up the stock of a defunct Dallas real estate investment trust. By
1981 they had acquired control, and five years and about 35 acquisitions later,
they had built Southmark into a publicly traded financial services company with
27,000 employees (including subsidiaries) and nearly $10 billion in assets. South-
mark's extraordinary increase in assets attracted a lot of attention, and Phillips's
eagerness to take unorthodox risks raised eyebrows. Forbes magazine said he and
Friedman ran Southmark more like their own private investment company than
a big public corporation. For example, when one of Phillips's own companies
was called upon to repay a construction loan, Phillips sold the company to
Southmark and let Southmark repay the loan. The deal cost Southmark $9.5
million. Pressed to explain Southmark's willingness to take on the debt, a South-
mark officer told reporters the venture "looked like an attractive project."

After thrifts were deregulated, Phillips hurriedly searched for one to finance
his acquisitions. In 1983 Southmark acquired San Jacinto Savings, and for three
years the S&L was under Phillips's control. But in 1986 worried regulators
ordered the S&L to stop funding Southmark's purchases, and Phillips had to
rely on another favored way to raise cash. That year he raised $950 million
through Drexel Burnham Lambert. In fact, much of Southmark's explosion in
assets, according to SEC filings, was financed by junk bonds marketed for Phillips
by his close friend Michael Milken, Drexel Burnham Lambert's junk bond king.
{Forbes reported Drexel Burnham made well over $50 million in fees by financing
Southmark and its subsidiaries.) When Phillips borrowed money,' he took more
than he needed and used the extra to invest in other companies' junk bonds
being marketed by Milken — a common practice of many of Drexel Burnham's

248 • INSIDE JOB

favorite customers. (Tlie practice bore a disturbing resemblance to the cash-for-
trash deals, where a thrift borrower was required to take more money than he
wanted and to use the excess to buy a piece of junk property from the thrift.
One year, The Wall Street Journal reported, Drexel raised $450 million for
Southmark, and Phillips used all of it to buy other junk bonds Drexel was
promoting.)^ Southmark became the largest real estate-based conglomerate fi-
nanced by Milken.^ It may also have been one of the most complex. Even
seasoned Wall Street analysts admitted to reporters they couldn't figure out the
company's maze and layers of debt. What they did know, however, was that
Southmark had a lot of debt coming due all at once in the early 1990s.

That outstanding debt didn't seem to phase Phillips. Records showed that
Southmark paid him over $1 million in 1988. He and his wife owned a $1
million condominium on Wilshire Boulevard in Los Angeles and a $10 million
estate in Dallas (previously owned by Lamar Hunt and, then, James Ling). He
traveled in a $3.5 million DC-9 that used to belong to singer Kenny Rogers.

Perhaps it was his hunger for cash that sent Southmark to the gaming tables,
a move that unwittingly exposed the company's close ties to Herman Beebe.
Whatever the reason, the afternoon of November 5, 1986, found Phillips, Fried-
man, and their attorney sitting at attention before the Nevada Gaming Control
Board. The commission's job was to make sure no one with criminal associations
or backgrounds got a casino license. Southmark owned the land where the Silver
City Casino in Las Vegas was located and had worked out an agreement with
the owners of the casino that Southmark could collect a percentage of the casino's
gambling revenues if the gaming control board approved.

But from the opening of the session it became clear that what the gaming
control board wanted to talk about was Herman Beebe. As soon as the board
had dispensed with preliminaries, one member got to the point:

"Mr. Phillips, could you please describe first of all how the relationship,
business relationship or otherwise, with Mr. Beebe came about occurring? Sec-
ondly, how it's evolved and, if you would, what the current relationship with
Mr. Beebe is?"

Phillips said that in 1984, shortly before Beebe was indicted, he and Beebe
had reached an agreement for Southmark to purchase Beebe's nursing homes
for almost $100 million. Beebe owned 62 nursing homes in five states with over
6,500 beds.

Then, Phillips said, before they could close the deal Beebe "ran into severe
financial difficulties" (a euphemism for Beebe's indictment and the resulting
fallout) and Southmark, Phillips contended, had to loan him money to keep
him afloat. Otherwise, Phillips said, Beebe might have gone into receivership
and the contract between Phillips and Beebe would ha\e been voided. Phillips
assured the gaming control board that Southmark would have had nothing to

Beebe Gets Caged • 249

do with Beebe after his indictment had it not been for PhilHps's desire to con-
summate the purchase of the nursing homes.

"Obviously, " said Phillips, "Mr. Beebe would not be the appropriate or
suitable type of individual to have an ongoing relationship with."

But, the commission member persisted, ". . . you loaned Mr. Beebe an
additional $29.6 million in a total of five other loans and made three other
purchases from Mr. Beebe, all after the date of his conviction." He enumerated
the transactions: February, $500,000 loan; April, $14.2 million nursing-home
purchase; May, $1 million purchase and $2.'? million loan; June, $1 million
loan; August, $25.5 million loan; and December ("almost a year after his con-
viction on fraud and wire fraud and other charges"), a $7 million purchase of
Beebe's Savings Life hisurance Company.

"Now, that adds up to $29.6 million'' in loans after the man was convicted,"
the commission member concluded. Then he got to the crux of the commission's
concern. "Mr. Beebe . . . had a $700,000' restitution levied [as a result of his
1985 conviction]. Would you know whether Mr. Beebe paid his fine with
proceeds of loans from your companies?" and again: "It appears that (Southmark's
loans to Beebe] were for the benefit of Mr. Beebe, to keep his head above water,
in a business sense, so that he could continue operating even after he had been
convicted of federal charges."

Phillips and Friedman stood their ground.' They readily admitted that for
a time they were propping Beebe up. They said they even tried to get control
of Bossier Bank & Trust. But all of those transactions were part of the original
nursing-home purchase agreement, made before Beebe was indicted, or were
attempts to keep him in business until they could conclude the deal. And all
the loans they made to Beebe, they said, had been repaid with the exception of
$1 million.

Phillips's explanations evidently satisfied the gaming control board, and after
a lengthy discussion of other topics, such as Phillips's 197? bankruptcy, the board
approved Southmark's request. And there our interest in Southmark might have
ended, except for the fact that the company had shown up in some of our earlier
investigations. We went back to our files and began compiling a list of South-
mark's appearances. Time and time again the company had turned up at the
end of our investigation of a failed thrift. Southmark would appear, most often,
in the role of scavenger, acquiring the troubled assets of those who had con-
tributed to the failure of the institution. We had found, for example, Southmark
or a Southmark subsidiary acquiring assets formerly owned by Mario Renda,
Robert Ferrante, Morris Shenker, John B Anderson, and Tom Nevis. Now many
of these deals were further confirmed by Phillips's testimony before the gaming
control board:

Southmark's Pratt Hotel division acquired the Palace Hotel and Casino

250 ■ INSIDE |OB

project in Puerto Rico, which investigators told us was being develojjed by Mario
Renda and Robert Ferrante until their empires crumbled; Southniark bought
the Double Diamond A. Ranch near Reno that had belonged to Tom Nevis;''
Southmark bought some of Morris Shenker's stock in the Dunes Hotel and
Casino when Shenker and John Anderson fell on hard times and tried to buy
control of the casino but lost out to a Japanese group; Southmark tried to buy
Eureka Federal Savings" liens against Anderson secured by his Maxim Hotel
and Casino; Southmark tried to fund the purchase of the Aladdin Hotel and
Casino by Harr>' Wood, a Shreveport native who ran the Dunes's junket op-
erations;'" Southiuark's S&'L subsidiary, San Jacinto Savings, got media attention
when it tried to buy troubled Continental Savings in Houston (Beebe had bank-
rolled Carroll Kelly and David Wylie in their purchase of Continental)." And,
finally, we discovered on a 1988 trip to Shreveport that Southmark now owned
the AMI Tower.

Then there were the "coincidences. " For example, Southmark's 1 0-K showed
Southmark owned 37 percent of Pratt Hotel Corporation,'- and in 1986 Pratt
was trying to buy Resorts International (which had opened Atlantic City's first
casino and which was building the $S25 million Taj Malial casino hotel there).
Funny, we thought. We'd just learned from Cage that Judge Edmund Reggie
had been a $10,000-a-month consultant for Resorts International for about a
year. When we checked with Reggie, he said the two events were unrelated.

Then we found Southmark's fingerprints at Silverado Savings and Loan in
Denver." Neil Bush, son of then Vice President George Bush, became director
on Silverado's board in 1985 but resigned just days after his father was nominated
in 1988 as the Republican candidate for president and just three months before
Silverado was forced by regulators to establish nearly $200 million in loan loss
reserves to cushion the thrift from expected losses on shaky deals. Neil Bush
said he resigned for personal reasons. Others said his resignation was to spare
his father the embarrassment of Silverado Savings' condition. (Silverado collapsed
in late 1988.) After all, one of George Bush's jobs as vice president during Ronald
Reagan's first term had been to chair the Bush Task Group on Regulation of
Financial Services. (The group was part of Ronald Reagan's deregulation ap-
paratus. It died a quiet death in August 1983 after accomplishing very little. )'■*

After we had collected all of this information about Southmark, we asked
ourselves what it meant, that Southmark, a giant corporation, had turned up in
investigations that we had thought at the outset were entirely unrelated. A
disturbingly large number of our trails led to Southmark in one way or another.
The company appeared to be a major player in the network of people wc had
been tracking — often there to pick up the pieces whenever one of our thrift
pirates hit rough water. Apparently someone else was wondering as well. When
the Dallas Times Herald printed the list of the 400 individuals whose records
were subpoenaed by the Justice Department's fraud task force in 1987, Gene

i

Beebe Gets Caged ■251

Phillips was among them. Southmark itself began to show up on the business
pages of daily newspapers, as Phillips and F'riedman were inereasingly forced to
deny that Southmark was in deep trouble. Its Houston thrift, San Jacinto, was
put under a supervisory order in 1988 and forced to take almost $140 million
in write-downs. Regulators forced Southmark to remove two of its three directors
from San Jacinto's board, and in early 1989, under pressure from Southmark
investors and directors, Phillips and Friedman resigned from their positions at
Southmark.

The Southmark puzzle was one of those black holes into which a reporter
could disappear and never be heard from again. One normally reliable source
even told us he had phone records showing that a real estate broker who had
close dealings with both Southmark and Carlos Marcello had also made phone
calls to Major General John Singlaub, of Contra-gate fame. We were intrigued,
but we had a deadline to meet and we had to leave the further unraveling of
Southmark for later. But we had discovered a powerful player in the thrift game
and we had learned who it was that had kept Beebe afloat after Cage convicted
him. Thanks to associates like Southmark, Beebe was not ever likely to be down
and out.

CHAPTER TWENTY-ONE

Round Three

1

I

After Herman Beebe's 1985 conviction he was assigned five years probation and
ordered to perform 200 hours of community service in Dallas. In early 1987 he
was performing that community service at the Dallas Life Foundation, a shelter
for the homeless. He was also selling employee benefit packages out of his office
in a new North Dallas complex near the Addison Municipal Airport, and he
claimed he was making $5,000-a-month payments toward the $1 million res-
titution the court had ordered. He divided his week between Dallas and his
California retreat at La Costa, hardly the life-style of a so-called ruined man.

Joe Cage's long arm soon served Beebe with a subpoena, and in February
1987 Beebe was grilled for six hours in front of the Louisiana grand jun- that
was still investigating his affairs. Shortly thereafter he agreed to an interview
with Shreveport reporter Linda Farrar, who had covered his 1984 indictment
and trial. She traveled to Dallas for the inter\iew.

This second grand jury, he said, was also going to indict him. "I asked them
[the jury], 'Just what do you want from me? I need to pay the people I owe . . .
just what are you seeking? I'm not a liar. If I did something, if you'll ask me,
I'll tell you.' "

He said to Farrar, "If you give me the money that's been spent on [inves-
tigating] me, I can put you, your mother. President Reagan, and everv'body else
in jail."

With a rueful smile he denied again the old allegations of Mafia ties and
casino skimming: "... try to find where I've ever been in the Mafia, where I've
been in drugs, where We done anything unethical in business. If I really had,
after ten years, somebody would find something really highly criminal.

"Given a little time to be left alone, I can pay off my debt because I'm smart
enough to do that. ... 1 need the government to leave me alone so I can put
my life back together. I'm a good businessman, I work hard, and I'm smart

252

Round Three • 253

enough. If they'll leave me alone, I'll he right back on top after two or three
years."

That was exactly what worried Joe Cage, exactly what drove him in his
dogged pursuit. The second Beebe grand jury had been in session almost two
years, meeting week after week, examining mountains of tedious evidence. And
then Cage got a real break. Late one winter evening, a Friday night after work.
Cage was sitting on the floor in his office studying documents and he came
upon a smoking gun that would become known as the Bussell notes. Beebe had
been claiming that he was just another victim of the scam Cage was investigating,
but these notes, written by his associate David Bussell,' appeared to prove oth-
erwise. The notes consisted of a list of figures with dates and notations like "we
owe half of this because we own one-half of the farm," and Cage believed they
proved Beebe had been a full partner in the deal. '"I'hey were handwritten notes
of a defendant, an admission of what we were trying to prove," Cage told us
later. He could hardly believe his eyes.

In the spring of 1987 Cage's grand jury indicted Beebe and charged him
with fraud involving $30 million in loans from over 16 financial institutions
spread from Colorado to New Orleans.- The loans had been made in 1983 and
1984 — during the very time the grand jury had been investigating Beebe the
first time — to Richard Wolfe, who was also indicted. (Charges against Wolfe
were later dismissed.) The indictment charged that Beebe arranged for Wolfe to
get loans from institutions where Beebe had "influence " (including Continental,
Ponchartrain, Vernon, Key, and State/Lubbock savings and loans) without the
loan papers reflecting that Beebe got a lot of the money. And this time Cage
didn't mince words. The charge, he said, was bank robbery.

Beebe later explained that Ben Barnes had introduced him to Richard Wolfe
10 or 12 years earlier, and a few years later he had run into Wolfe again at
Vernon Savings. They decided to do some business together.' Richard Wolfe
and his Dallas attorney, David Wise, were hip-deep in Beebe's bank network.
Wise himself chartered at least five banks that the comptroller's report identified
as Beebe banks.

One of the companies named in the 1987 indictment against Beebe and
Wolfe was League, Inc. We thought there was something familiar about that
name. We checked with Cage and, sure enough, at one time a Southern Cal-
ifornia developer, G. Wayne Reeder, had discussed becoming a partner in
League, Inc. We looked in our files and found a League, Inc., document with
Reeder's signature on it, right next to Beebe's. In fact, said Beebe's former right-
hand man Dale Anderson, Beebe and Reeder had tried to do several deals
together. "Herman must have run into Reeder while staying down at La Costa,"
Anderson said. (Both men had homes at La Costa.) We had run into Reeder
often ourselves, beginning months earlier during our investigation of San Marino
Savings in San Marino, California. (San Marino, one of the first thrifts where

254 • INSIDE JOB

we ran into Mario Renda, failed in late 1984.) Reeder was a multimillionaire
said to have holdings in 16 states, and the Justice Department confirmed that
by mid-1989 he was under FBI investigation in Tennessee, Rhode Island, Ar-
izona, Texas, California, and Florida in connection with a number of his busi-
ness deals in those states (no charges had been filed as of this writing). Once
again a trail we had been following had unexpectedly wound up at Beebe's door.*

The walls were closing in on Beebe and his small legion of surrogates. The
FSLIC filed a civil suit in June (Beebe was mentioned but not sued) and claimed
that in 1982 and 1983 State/Lubbock had loaned $4.5 million to Fred Bayles
and others who were straw men for Beebe. Beebe, they said, had actually gotten
the money. The comptroller of the currency report listed Fred Bayles as a key
member of Beebe's banking consortium. He had bought stock in several banks
with Beebe's help, including stock in a bank where Judge Reggie was a director.
When Beebe needed it Bayles would have his own institution place deposits at
Beebe-controlled banks at a very low interest rate. And then when Bayles got
into financial trouble, records showed, AMI absorbed his banks. When asked
about his business Bayles replied, "What we are is, we're in the borrowing
business. " In 1985 Bayles pleaded guilty to bank fraud in Mississippi, and in
1988 he was convicted of bank fraud in New Jersey.

"That old boy," said one acquaintance about Bayles, "could sell the
Brooklyn Bridge. He was going to court to get sentenced to five years (for
the Mississippi bank fraud), and he spent 20 minutes with the judge and
the judge gave him five years probation." He got one year for the New Jersey
conviction.

Bayles interested us because we had run across him earlier at North Mis-
sissippi Savings and Loan in Oxford, Mississippi, where he was a big borrower.
Some law-enforcement officials wondered out loud to us if he had fronted for
Beebe there too. The man who owned the S&L, a Dr. Joseph Villard, claimed
he had been Beebe's physician when Beebe lived in Alexandria, Louisiana,
before he moved to Shreveport. When we talked to Villard he mentioned that
San Antonio loan broker John Lapaglia was his friend. In fact, he said, "John
might be a second or third cousin to me, just by accident.'"" (In January 1984
North Mississippi's president and owner were indicted for several counts of wire
and bank fraud. They pleaded guilty to some of the counts.)

We had originally taken a look at North Mississippi not because Beebe had
ties there (in fact, when we first looked at North Mississippi, we had never heard
of Herman Beebe) but because Mario Renda's F'irst United Fund was involved
in "special deals" there. Now we learned that both Renda and Beebe, or their
associates, were working deals out of North Mississippi Savings. Apparently when

Round Three • 255

word traveled the thrift grapevine that an S&L was willing to deal, both Rcnda
and Becbc quickly got the news.

An FBI agent investigating thrift failures in the Sunbelt area said it reminded
him of the Depression days when hobos would paint a large "X" on the sides
of a barn to tip other hobos that the ham was a friendly spot to curl up for the
night. Hundreds of S&Ls must have had big X's scrawled on their backsides.

Beebe continued to try to do business out of his office in North Dallas, but
the grand jury indictment in the spring of 1987 and the FSLIC lawsuit filed
soon thereafter made it more and more difficult for him to maneuver. And
behind it all, in Beebe's mind, was Joe Cage. Cage was ruining him. He was
dragging him down. Cage was like a mad dog who wouldn't let go of Beebe's
leg. Something had to be done. Beebe decided to hire Gerry Spence.

Spencc was a famous millionaire cowboy attorney from Jackson Hole, Wy-
oming. He had gotten national recognition in 1979 by winning a $10.5 million
settlement against the Kerr-McGee Corporation in the Karen Silkwood pluto-
nium-contamination suit. In 1981 he got a huge judgment against Penthouse
magazine for allegedly libeling Miss Wyoming in a cartoon. He was credited
with having mastered a courtroom style that went from the easy manner of a
front-porch philosopher to what Esquire magazine described as the "fevered pitch
of the country preacher in the grip of divine inspiration." Spence said he viewed
the courtroom as a place of "blood and death," and in 30 years as a lawyer, he
claimed to have seldom lost a case. Beebe decided to hire Spence to represent
him in his third round with Cage.

Spence agreed to take Cage on and came out swinging. He filed an 80-page
motion with the Louisiana court in the summer of 1987 requesting that Cage be
disqualified from prosecuting Beebe's case. In his motion he charged Cage with
"prejudicial and vindictive misconduct." He accused Cage of having conducted a
personal vendetta against Beebe. He said the whole witch-hunt was politically
motivated, that Cage was trying to make a name for himself at Beebe's expense,
that Cage showed no sense of justice, fair play, or decency. He told the judge that
Cage had harassed Beebe's business associates and had offered Beebe freedom if
Beebe would "give [to Cage] the governor and Judge Reggie." Judge Stagg, who
had presided over the first two Beebe trials, agreed to hear the motion and for six
and a half days Spence raked Cage over the coals before the judge.

Spence was in rare form. A massive man, six feet two and more than 200
pounds, he wore a brown suit and cowboy boots and carried a Stetson into the
courtroom on the opening day of the hearing. He had long gray hair that was
swept back on the sides in ducktails and hung down over his collar. He stalked
the courtroom, hands in his pockets, at times leaning back on his heels, clutching

256 • INSIDE JOB

his glasses in his teeth, his demeanor rich with histrionics. Sp)ence called Cage
to the witness stand and kept him there over two days.

'isn't it true that one of the overriding compulsions of your life has been
the prosecution of Mr. Beebe?" Spence demanded.

"No, sir," Cage replied.

"Would you grant me that it has been the most important case of your
career?" Spence asked.

"Yes, sir, that's true," Cage answered.

"In all the Beebe cases, wouldn't you take all the witnesses that Beebe could
use to defend himself and threaten them with prosecution?"

"No, that hasn't been my tactic."

Cage kept his cool. Sometimes he appeared amused, sometimes irritated.
But he was polite to the bitter end, answering questions with "Yes, sir," and
"No, sir" while steadfastly maintaining that his investigation and prosecution of
Beebe had been completely fair.

Spence, on the other hand, couldn't seem to think of an analogy too venal
for Cage. He accused him of criminal acts, of conspiring with another attorney
to set Beebe up. In one two-hour diatribe Spence began by referring to the
"blessed liberty" of constitutional rights and the dangers in abuse of prosecutorial
power.

"A prosecutor has the power to destroy human beings," he said. "Like mold
on an otherwise scrumptious pie, it has to be removed."

He referred to Cage's behavior as "repulsive" and "patently silly." Cage's
occasional "I don't remember" he characterized as "a lie that can't be proven."

He equated Cage and a former Beebe defense attorney who was a friend of
Cage's as "twin black holes in space. These people should be called the Euripides
twins." As with black holes, "information was sucked in and nobody heard or
saw anything after." They were, he said, a "double-headed monster." Beebe,
he said, "was hog-dressed. The last hair was scraped off his naked hide" by Cage
and his team.

Spence's attack sounded so vile that shocked courtroom spectators turned to
whisper to each other. Several times Judge Tom Stagg admonished Spence,
sometimes calling him to the podium for consultation. At one point during a
particularly thunderous oration by Spence, Stagg pointedly commented that
poor hearing wasn't one of his problems.

Spence's charges were more than empty rhetoric or courtroom drama. If the
judge had ruled in his favor, there could have been serious career repercussions
for Cage. When Spence finally ran out of steam. Cage was livid and began work
on a written response to Spence's allegations, which he filed with the court.

"The charge that my professional life has focused on the goal of toppling
the Beebe empire is completely ridiculous. I am accused of questioning almost

Round Three • 257

every person who has ever conducted business or been associated with Mr. Beebe.
Then I'm accused of failure to seek out material evidence favorable to Mr. Beebe
that was readily available to me. If the questioning of almost every person Mr.
Beebe has dealt with would not reveal anything favorable to Mr. Beebe, what
would? . . . If the investigation and resulting 19-count indictment is considered
'Bcebe-hunting,' then so be it."

After taking under consideration Spence's motion to remove Cage from the
case. Judge Stagg ruled that Cage's investigations had been fairly done and the
case could proceed.

"We have excellent lawyers here," he said. "Both sides are intractable in
their belief they are right."

The adversaries met again in the courtroom in the fall of 1987 — Spence for
the defense, Cage for the prosecution. The trial was again being held in Lafayette,
200 miles south of Shreveport, so Cage and his team were .staying in a motel
near the Lafayette courthouse. This time Cage knew he had Beebe nailed. Along
with all the other documentation and evidence he had amassed, he had the
Bussell notes, which were an admission of guilt in the handwriting of one of
Beebe's close associates.

The trial proceeded as Cage had expected until the day before the case was
to go to the jury. In a surprise move Judge Stagg decided in favor of a defense
motion that Cage not be allowed to refer to the Bussell notes in his closing
arguments. Cage was devastated. The Bussell notes were the key to his case. He
had intended to hammer them home to the jury the next day iii his closing
arguments. In a moment of frustration he told a Texas reporter that "the judge
has sabotaged my case."

The next morning Cage did not show up in the courtroom. His assistant
appeared to handle the case. Word spread quickly that Cage had disappeared.
Rumors ran wild. Where was he? What had happened? After all these years,
the thousands of hours, where was he?

The jury deliberated two days and on the third day sent word that they were
unable to reach a verdict. Judge Stagg declared a mistrial. Cage, who had been
monitoring the progress of the trial from the motel, saw years of work slip away
into nothingness. He couldn't understand why Judge Stagg had made the ruling
about the Bussell notes. But he knew why he had refused to go back into the
courtroom. It was a matter of principle with him. Even though he knew Judge
Stagg would hold him in contempt of court and could even put him in jail,
even though he knew he could very well be fired, the Beebe case was too
important not to register his protest in the strongest po.ssible manner. He and
Blount believed they knew the extent to which Beebe's scams threatened the
financial fabric of Louisiana and surrounding states. They also believed they
knew how deep within the political power structure Beebe's influence ran. They

258 • INSIDE JOB

had successfully prosecuted Becbc once, and they wanted a second felony con-
viction to make sure he wouldn't be able to worm his way back into action.
They had put everything they had into a thorough prosecution of the case.

A sober prosecution team headed back to Shrc\ eport. Judge Stagg found Cage
in contempt of court and a panel of judges reprimanded Cage for abandoning the
Beebe case to his assistant. But they could have done much worse, and Cage be-
lieved their comparatively gentle treatment of him also sent a message to Stagg,
who removed himself from further involvement in the case. The ball was once
again in Cage's court. Should he go for a retrial? Plenty of people told him he
should drop the case, but he decided to go for it. One more time. You could have
almost heard Beebe's sigh of despair. Stagg was gone and Cage was back.

Beebe's fourth trial was set for May 31, 1988. But this time Cage had
company. The U.S. attorney in Texas had indicted Beebe on charges stem-
ming from Cage's investigation, including a $4.4 million loan Beebe had
gotten from State Savings/Lubbock. I'he one-two punch was too much for
Beebe. And with Judge Stagg out of the case, who knew what the new judge
would be like?

In March, Beebe told the Shreveport Times he'd done nothing wrong and
"this is a bunch of bull." But on April 29 he threw in the towel and cut a
deal. ... He agreed to plead guilt>' to two counts of bank fraud and he agreed
to cooperate with the ongoing criminal investigations into fraud at banks and
S&Ls in Texas and Louisiana. In return the government agreed not to prosecute
him for any other fraud then under investigation in northern Texas (which
excluded large parts of Texas) or western Louisiana. Beebe's lawyer said Beebe
pleaded guilty because he was out of money and wanted to put six years of
litigation and harassment behind him.

At his sentencing, before a Louisiana judge, Beebe sat in silence while the
three lawyers representing him — former Louisiana Governor David Treen, for-
mer Shreveport II. S. Attorney J. Ransdell Keene, and Jim Adams — argued
vigorously that Beebe should not have to serve any time in prison. Cage was
also mysteriously silent, not challenging Beebe's attorney and not demanding
that Beebe do some time. As a result U.S. District Judge John M. Shaw, who
could have sentenced Beebe to ten years in prison, gave him instead only a year
and a day. Later Shaw .said Cage had not asked for any jail time for Beebe, but
"I just felt he had to see the inside of a jail. "

When word got out that Beebe would spend, at the most, a year in prison.
Cage was widely criticized for devoting so much time to the Beebe pursuit and
then not fighting for a stiffer sentence. In response Cage .said Beebe had agreed
in the plea bargain to give "complete, truthful, and accurate information and
testimony, " and Cage expected him to cooperate in the pro.secution of other
bank frauds that he hoped would land bigger fish. If he didn't. Cage said he
and the Texas prosecutor could drop the plea bargain and prosecute Beebe.

Round Three • 259

Besides, Beebe now had three felony convictions (the 1985 conviction and the
two included in the 1987 plea bargain) and that ought to be sufficient to keep
him out of the banking business.

Bigger fish? What bigger fish? Bigger than Beebe? Carlos Marcello was
already in prison. Who was left that was bigger than Beebe?

Cage had turned his sights on Judge Edmund Reggie. He had begun to dig
into financial transactions at Judge Reggie's Acadia Savings and Loan in Crowley,
Louisiana. Though Cage would not discuss his investigation, which was still in
progress when we went to press, the FSLIC filed a civil suit in Augu.st 1988
against Reggie and other officers and directors of the thrift (citing 20 loan trans-
actions, involving over $40 million, that regulators alleged caused the collapse
of Acadia in August 1987) and in that suit we could see the direction Cage's
case might be taking. ''

Between 1982 and 1986 Acadia Savings had, according to regulators, made
several loans that benefited Beebe and Judge Reggie. (Our favorite was the loan
that went to bail Reggie family members out of the Daddy's Money Condo-
miniums.) But even more interesting, regulators said that in June 1985 the
Acadia Savings board had loaned Gilbert Beall (of Texas and Florida) and Fred-
erick Mascolo (of Connecticut) each $2.95 million. The collateral for the loans
was 106 acres in an area in the Pennsylvania Poconos where gambling was under
consideration.

The Poconos property rang a bell with us, and we located it in our Aurora
Bank file. Documents in our file showed that Beall and Mascolo had acquired
the property from Anthony Delvecchio and Jilly Rizzo, whom we had met at
Flushing Federal working with mob stockbroker Mike Rapp. Aurora Bank in
Denver had been busted out in 1984 and 1985 by John Napoli, Jr.'s racketeering
scheme. The FDIC sued Rizzo and Delvecchio (and others) in the case,^ alleging
that Rizzo and Delvecchio tried to hide their Aurora Bank take from the FDIC
by laundering it through the Poconos property. When Rizzo and Delvecchio
sold the property to Beall and Mascolo, regulators in Colorado and Pennsylvania
filed lawsuits claiming that the sale was a sham attempt to keep the FDIC from
confiscating the 106 acres.*

Even more troubling to Cage, however, was what Beall and Mascolo alleg-
edly did with the $2.95 million they each borrowed — and never repaid — from
Acadia Savings. Regulators alleged they spent only about $700,000 on the Po-
conos property. The rest, they said, was divided up:

Beall and Mascolo allegedly bought $2 million worth of stock in Lou-
isiana Bank & Trust of Crowley, where Reggie was also a stockholder
and was chairman of the board. The bank was about to collapse, reg-
ulators said, and they saw this move as a way for Reggie to recapitalize
his troubled bank.

260 • INSIDE JOB

They loaned another $490,000 of the money to a Reggie partnership,
which secured the loan with an lOH from Beebe's AMI, the FSLIC
alleged.

And they bought $1 million worth of stock in a company controlled by
themselves in partnership with Mike Rapp's associate Lionel J. Reifler,''
who was also said to be involved in the plans to develop gambling on
the Poconos property. Reportedly they also paid Rcifler another $500,000
that Mascolo owed him.

Regulators alleged that Acadia Savings had made another such loan. In May
1985 Acadia loaned $1.8 million to a company to buy 154 St. Tropez tanning
beds, but they said much of the money really went to Rcifler, Ma,scolo. and
Beall. When regulators tried to file a claim with the company that bonded the
loan, it turned out to be an offshore company in the Grand Cayman Islands
and it didn't have enough money to pay the claim.

Cage had been untangling these relationships at the very time that Beebe's
high-powered attorney, Gerr>' Spence, had attacked him personally in open court
and asked the judge to remove Cage from the Beebe case. At that time Cage
had retired from the field of battle and prepared a blistering written rebuttal that
not only attacked Beebe but laid out Beebe's relationship with Reggie in damning
detail. We obtained a copy of the extraordinary' affidavit, which Cage had filed
with the court.

In the affidavit Cage tore into Beebe, Governor Edwards, Judge Reggie
and their relationship to each other. He was worried, he said, about their plans
to bring casino gambling to Louisiana"' and he was worried about what he
called "the Reggie connection with organized crime, Mafia, or La Cosa Nostra
figures.""

Cage told in his affidavit about the Acadia Savings loans that he said indirectly
benefited Rcifler. He said that Reggie's Louisiana Bank & Trust of Crowley in
1985 had made $1.5 million in loans (secured by worthless annuities) that
"benefited Reifler and Reggie." He quoted the Woodie Guthrie line — which
was the source for the title of Jonathan Kwitny's book. The Fountain Pen
Conspiracy — to point out that Rcifler appeared in Kwitny's book'- as an associate
of Edward Wuensche, one of the nation's leading dealers in stolen securities
who worked with Reifler at the same time that he (Wuensche) was deeply in\olved
with the New Jersey mob."

In his affidavit Cage pleaded with the court to understand that he was not
some obsessed prosecutor:

"[My] motivation was and is not political but one of grave concern for the
stabilitv of the financial institutions in the Western District of Louisiana. The

Round Three • 261

appearance of organized crime in the Western District of Louisiana, likewise,
causes [nie] a great deal of concern. The indicia of organized crime is truly
frightening and worthy of the most relentless pursuits hy those in law enforce-
ment."

The Cage affidavit infuriated judge Reggie. He told coauthor Mary Fricker
that he believed Cage was pursuing him for political reasons (Cage was a Re-
publican appointee). "The Cage affidavit is absolutely a lie. That affidavit did
more to damage me than anything in my lifetime. ... He [Cage] has made
me a target of his investigation for nearly seven years. ... If he thought I had
connections with the Mafia, where was his evidence?" Reggie said he met Reifler
through Beall, who had been an attorney with Fulbright and Jaworski in Houston.
All of the Beall loans were approved in advance by state regulators, he said,
and, anyway, by that time he was no longer active in the thrift's affairs.

In regard to the FSLIC civil suit, Reggie told us he had never benefited
improperly from any of the S&L's transactions. "I never drew a single expense
account. 1 never charged them a nickle. Never charged them a legal fee.'"*
Because we loved the savings and loan. I bet not another law firm in America
can say that. That's why my feelings are just crushed. . . . Iloved Acadia Savings
and Loan."

"Yeah, he loved it to death," one Reggie critic quipped.

Cage agreed. In May 1989 the grand jury indicted Reggie for bank fraud.
A week earlier Beall and Reifler had pleaded guilty to violating banking laws
and were said to be cooperating with Cage's investigation. Just five months earlier
the SEC had charged the two men with fraud in connection with a Boca Raton,
Florida, penny stock scam. Both the Acadia Savings and the SEC cases were
pending as of this writing. Whatever the outcome, Acadia Savings had clearly
been victimized by the hit-and-run gang of swindlers we knew very well.

In July 1988 Herman Beebe finally went to prison, courtesy of Cage and
Blount. But his sentence was only one year and a day. We well remembered
his words to reporter Linda Farrar, "I'll be right back on top after two or three
years," and we didn't doubt it for a minute. Beebe had opened a window for us
into the world of banking as it was done "down home" in Texas and Louisiana.
TTie mob was active there, but in addition there was a good-ole-boy "mob" that
had been fleecing financial institutions as a matter of birthright for generations.
A group of Arkansas-Louisiana-Texas businessmen with the most powerful po-
litical connections had been using financial institutions for their own purposes
for years. Fiduciary duty meant little to them. They ran their banks the same
way they would have run their cattle ranches. They walked the thinnest possible
line between legal and illegal, and some of them regularly crossed that line.

262 • INSIDE JOB

The occasional attempts to blow the whistle on the ring went nowhere. Regu-
lators, prosecutors, and reporters came and went, but the Southern power struc-
ture remained.

The wholesale looting that occurred in the thrift industr>' in Texas and
Louisiana (and later spread to surrounding states) in the 1980s would not have
been possible in an environment that unambiguously condemned such behavior.
Texas and Louisiana, in particular, lacked such an ethic. In fact, when it came
to changing management at a bank or thrift, the attitude was perhaps best
characterized by what a voter said when Edwin Edwards was finally defeated as
governor. Asked if he felt the new governor and his people might be more honest,
he replied, "No, it's just turning the fat hogs out and letting the lean hogs in."
So it was with Texas and Louisiana banks and thrifts. The U.S. taxpayer will
pay a high price for that erosion of ethical business standards — an erosion fa-
cilitated and exacerbated by deregulation of the thrift industry, which sent the
wrong message to the wrong people.

CHAPTER TWENTY-TWO

A Thumb in the Dike

The last three years had been very difficult for Ed Gray. When he took the job
of Federal Home Loan Bank Board chairman on May 1, 1983, he was the
darling of the thrift industry's chief lobbying group, the U.S. League of Savings
Institutions, and a Reagan administration insider. Eighteen months later it would
have been hard to find anyone to say a nice word about him. The U.S. League
worked overtime to lobby against his proposed regulations, and forces high in
the administration worked for his ouster — all because of Gray's attempt to stem
the avalanche of thrift failures by putting a lock on brokered deposits and by
limiting a thrift's direct investments and rapid growth. In an administration where
any form of deregulation was applauded. Gray had become an outcast, "the
great re-regulator. "

Ed Gray could not have been prepared for this fire storm. No FHLBB
chairman in the entire 50-year history of the post had been faced with the kind
of crisis Gray faced. The job had always been an easy one, with clearly defined
responsibilities, chief among them being to do the thrift industry's bidding. The
chairman was expected to serve out his relatively low-paying post ($79,000 a
year), after which he would be rewarded with a well-paying thrift industry po-
sition. But these were not ordinary times. The seeds of the thrift crisis had been
planted nearly three years before Gray arrived, but it was Ed Gray who faced
the bitter harvest.

Texas thrifts had reacted most violently to Gray's restrictive regulations. A
"get Gray" movement began to take form in Texas, spearheaded by Texas thrift
lobbyist Durward Curlee and loan broker and Republican activist John Lapaglia.
Lapaglia, whom we had originally encountered brokering loans for Norman B.
Jenson and Philip Schwab, owned Falcon Financial in San Antonio. He fired
the opening salvo with a full-page ad attacking Gray's new regulations. ' The ad
was entitled "An Open Letter to the Congress of the United States. " It ran in

264 • INSIDE JOB

the Dallas Morning News during the Republican National Convention in August
1984. Lapaglia followed up by stalking the halls of the convention handing out
copies of his weekly newsletter. Falcon Newsletter, to attendees. The newsletter
became a weekly denunciation of Ed Gray and his policies. Lapaglia told us he
mailed the letter to 380 Southwestern thrift executives.

In September Lapaglia shot off a letter to President Reagan. He complained
bitterly that Ed Gray's policies were strangling the Texas thrift industry, which
had been doing just fine before Gray began to interfere. He begged the president
to do something about Gray. But he also knew an election approached, and he
let the president know that if Reagan didn't fire Gray right away, he would
understand:

We are very mindful of our obligations to not raise sensitive issues until
November; accordingly, 1 shall personally take no action that would not be
beneficial to the Administration. After that time I expect to lead an industry-
wide effort, which at this moment consists of fifty-five savings institutions,
in bringing a class-action suit against Chairman Edwin J. Grey [sic] and the
FHLBB.

Lapaglia kept his word and waited until after the November elections before
acting. Then in December, he told us, he organized a trip to Washington. D.C.
He was accompanied by thrift attorney Robert Posen,- John Mmahat, who was
CEO of Gulf Federal Savings of Louisiana, and singer Wayne Newton, whom
Lapaglia said was "having some problems with millions in loans he had on a
resort in the Poconos."' Also attending the Washington meeting were Texas
thrift lobbyist Durward Curlee^ and Frank Fahrenkopf, Jr., chairman of the
Republican National Committee. They met with Danny Wall in the offices of
the Senate Banking Committee, which was chaired by Senator Jake Gam. Wall
was Gam's chief administrative aide. (In 1987 Wall would succeed Ed Gray as
chairman of the FHLBB.) Posen, who led the meeting, protested to Wall that
Gray's new policies were too extreme and they would strangle the industry. Wall
listened but did not respond.

Suddenly the secretary stuck her head in the room. "Mr. Newton, the First
Lady is on the phone for you." (Newton was a close friend of the Reagans.)

Newton left the room to take Nancy Reagan's call. When he returned the
meeting resumed. A few minutes later the secretary knocked. "Mr. Newton, the
phone again. It's the president."

Newton left the room again, returning a few minutes later to summon
Fahrenkopf. "The president wants to talk to you now, Frank, " he told Fahren-
kopf.

When Fahrenkopf returned from talking to the president, he called the
meeting to a close, telling the others that he would look into the matter. Ac-

A Thumb in the Dike • 265

cording to Lapaglia, President Reagan had asked Fahrenkopf to rein in FHLBB
chairman Ed Gray. Mmahat later descrilied the meeting in a manuscript he com-
missioned entitled "To Kill An Eagle." He summed up the outcome of the
meeting: "It later became clear that Gray's friend, supporter and sponsor, At-
torney General Edwin Meese, prevailed over any influence that Wayne Newton
and the Chairman of the Republican National Committee had with the Pres-
ident of the United States. As a result of that support, Edward Gray continued
on his course of conduct which, it is now clear, aggravated the present crisis."

Like so many who villified Gray, Mmahat exaggerated Gray's involvement
in day-to-day details. As extraordinary as this meeting and conversations with
the president were. Gray later told us he was unaware the meeting even occurred
and denied Fahrenkopf ever put any pressure on him about FHLBB policies in
Texas. Fahrenkopf himself characterized the above account of the meeting as
"pure fiction." Gray did tell us, though, that at about that time he began giving
Fahrenkopf regular briefings on his actions in Texas because he felt that Fah-
renkopf had the president's ear.

"I'd been told by a high White House staffer to stay away from the White
House," Gray told us. "He told me that if I made an appointment with the
president, Don Regan would bad-mouth me before I got there, sit in on the
meeting, and bad-mouth me after I left." So, Gray said, he hoped he could get
his messages to Reagan through Fahrenkopf

The appearance of Frank Fahrenkopf at that meeting was puzzling. What
stake could the Republican National Committee have in all this? Maybe Fah-
renkopf was responding to Lapaglia's warning that Gray's actions could cost the
party the support of the thrift industry. But we learned that he also may have
had a business relationship to protect. According to the Colorado Springs Gazette
Telegraph, Fahrenkopf and Newton — for whom Fahrenkopf sometimes per-
formed legal services' — were at that time involved in a complex transaction with
the holding company of United Savings Bank (a thrift) in Wyoming. Fahrenkopf
was borrowing $100,000 and Newton $200,000 to invest in an RV park in
Bullhead City, Arizona, not far from Las Vegas. ^ The RV investment was being
orchestrated by a Las Vegas loan broker, John Keilly, who had shown up in our
Centennial investigation — he had introduced Norman Jenson to Sid Shah. (In
the 1970s Keilly did 27 months in prison for bribery in connection with a $1.25
million loan from a Teamsters Union pension fund, according to published
reports.) Another investor in the Bullhead City RV park was John Pilkington,
described to us by a Nevada Gaming Control Board investigator as a longtime
associate of Morris Shenker.

So Newton had at least two reasons to support thrift deregulation: one in
the Poconos and one with partner Fahrenkopf in Bullhead City, and Fahrenkopf
may also have had his own investments in mind at the Washington meeting
with Wall.

266 • INSIDE JOB

Gray was still struggling at that time to get a sense of just how big a problem
he had on his hands. His examiners in the field were giving him one story —
that the situation was bad and getting worse — while industr)- "experts" were
saying that the problems were temporar\', caused by the recession, and were
nothing to worry about. Gray received a letter fi^om respected economist Alan
Greenspan (later to he appointed Chairman of the Federal Reserve Board) telling
him he should stop worr\ing so much. Greenspan wrote that deregulation was
working just as planned, and he named 17 thrifts that had reported record profits
and were prospering under the new rules. Greenspan wrote the letter while he
was a paid consultant for Lincoln Savings and Loan of Irvine, California, owned
by a Charles Keating, Jr., company.' Four years after Greenspan wrote the letter
to Gray, 15 of the 17 thrifts he'd cited would be out of business and would cost
the FSLIC $? billion in losses.

Gray's regulation limiting direct investments and growth had finally taken ef-
fect in mid-March 1985 and a lot of thrifts did not measure up. Centennial Sav-
ings, Vernon Savings, Flushing Federal — the list ran into the hundreds. The
U.S. League had opposed the new regulation fiercely before it was adopted by the
Bank Board, but they suddenly changed sides when they saw Gray had Senator
William Proxmire, the powerful Senate Banking Committee chairman, on his
side. Also, the growing number of thrift failures had begun to scare the League. It
was becoming clear that accommodating the bad-boy S&Ls was eventually going
to cost the other thrifts billions. In fact, they realized, if the carnage were really se-
vere, it could lead to public pressiue to re-regulate the entire industry.

But in Congress the old adage that money was the mother's milk of politics
held true. P'ollowing deregulation the thrifts became the cows, and there were
certain congressmen who never missed a milking. Go-go thrift operators had
plenty of money, and they were sharing it with their friends in Washington.
We'd already seen that Congressman Tony Coelho (D-Calif. ) had nuzzled right
up to Don Dixon at Vernon; Congressman Doug Bosco (D-Calif. ) had Erv
Hansen at Centennial; and Speaker Jim Wright (D-Tx. ) had Tom Gaubert at
Independent American in Dallas. Now we learned that Charles Keating, Jr.,
his employees, business associates, friends, and family had donated $220,000
to Arizona politicians, $85,000 to California worthies, $34,000 to Ohioans, and
more— $440,000 in all.

While Keating and his associates were giving politicians money, Ed Gray
was giving them only headaches. No sooner had Gray's direct investment reg-
ulation gone into effect than 220 members of the House of Representatives had
signed a resolution asking the Bank Board to delay the implementation of the
new rule. Congressional hearings were scheduled for late March 1985:

Representative Frank Annunzio (D-lll.) looked down the long table at Gray,

A Thumb in the Dike ■ 267

U.S. League President Bill O'Connell, and others who had eomc to testify in
favor of the direct investment regulation.

"We ask that the agency postpone the effective date of this rule," Annunzio
boomed.

"I'hat's impossible, Congressman," Gray said he replied. "It's been in effect
since March 18."

Annunzio countered, "The Bank Board is acting too hurriedly in putting
the regulation into existence. It could well be the beginning of the end to the
dual banking system in this country."*

Gray reminded the congressman, "It's the FSLIC, not the states, that has
to pick up the tab for thrift failures, Congressman."

Annunzio was unswayed and again demanded that Gray delay applying the
new regulation.

"Mr. Annunzio" — Gray bristled — "if it is rescinded or postponed, losses
. . . will fall squarely on the shoulders of the Congress itself We cannot delay
implementation."

Gray said Annunzio flushed with anger, took a deep breath, glared down
the table, and then stormed out of the hearing room in protest. With Annunzio
gone, Representative St Germain, chairman of the House Banking Committee,
finally came to Gray's aid. He said he agreed with the Bank Board's new reg-
ulation, adding, at long last, that he had little sympathy for thrifts that asked for
concessions.

"They can just go jump in a lake," St Germain said as he gaveled the hearing
to a close.

Everyone knew the fight couldn't be over. There were too many shaky thrifts
across the country that would not be able to survive under Gray's new rules. If
they had to dispose of some of their direct investments, which they were carrying
on their books at inflated prices, their houses of cards would tumble because
they would have to take large losses. Still, the regulation went into effect and
FHLBB examiners across the country began measuring thrifts by the new yard-
stick. Then Gray had to turn his attention to another old problem. There weren't
enough examiners. Gray needed more eyes and ears in the field if he was to
enforce his new regulation. He had 3,200 thrifts (handling a trillion dollars in
deposits)"* but his examination staff numbered only 679. That was about one
examiner for every four and a half thrifts. Some institutions had gone over two
years without an examination. Gray figured he needed to double his examination
staff, at least, if he was to effectively enforce his new regulation — or any of the
old ones for that matter.

Gray picked up the phone and called Dave Stockman at the Office of
Management and Budget. Stockman held the purse strings and would have to
approve any increase in staff at the Bank Board.'" But Stockman had no interest
in helping Gray, who a year earlier had humiliated him by shooting the FCA

268 > INSIDE JOB

job out from under him, and Gray had to meet with his assistant, Connie
Horner. Horner said she was a busy person, but she said she could squeeze him
in over lunch at the White House.

As Gray walked through the iron gates of the White House on the way to
the executive lunchroom, he reflected that the root of the thrift problem was
the "high fliers," as he liked to call them — the wild and crazy guys like Dixon,
McBirney, and Hansen. Gray had made his high-fliers speech many times, and
that day he planned to tell Horner again that high fliers were using brokered
money to engage in risky and complicated in\estments, many of them fraudulent.
To stop the abuses he needed more examiners to ferret the con men out of the
system. Gray had butted heads with Horner over staffing before, but he was sure
this time she'd sec the wisdom of his case.

As they settled in for lunch at the White House senior mess, an oak-paneled
dining room where only the cabinet and senior aides to the president were allowed
to dine. Gray laid his cards on the table. He wanted to double the examination
staff to 1,400. What's more, with a turnover rate exceeding 30 percent, he
needed to raise examiners' base pay from an average of $14,000 a year to a level
more competitive with private industry examiners. Gray said Homer ate and let
Gray talk. She had been through all this with him before. Like the Dickens
character in Oliver Twist, Horner always responded the same way to Gray's
requests for additional staff: "You want more examiners?? "

She told him it wasn't a matter of money but of philosophy. The admin-
istration's philosophy was one of deregulation. That meant fewer regulators, not
more. As Gray listened to her recite the administration mantra, he reflected on
her own bloated staff. Each time Horner trooped over to his office for a meeting
she dragged with her a staff of eight. They filed in behind her like baby quail
behind their mother. He could never understand why she brought them along,
since they never seemed to do or say anything.

Gray looked around the lunchroom while Horner lectured, noticing how
much the senior mess resembled the interior of a ship. Horner speculated out
loud that maybe, just maybe, she could swing 30 more examiners for him if
Gray would be more cooperative and get back into step with the administration.
Gray said Horner also issued a thinly veiled warning, reminding Gray of his
expense-account troubles. She even suggested he could go to jail if his overages
proved to be a violation of something called the "Anti-Deficiency Act," which
mandated how much the Bank Board could spend. Gray was already over that
amount, she claimed, way over it. Gray said there must be some mistake and
he'd clear it up. (A few months later it was discovered that an OMB accountant
had "misplaced" a decimal point and Gray was, in fact, within his budget.) But
the message Horner sent was clear: The administration could play hardball with
one of its own if that person strayed too far off the reservation.

Gray, however, had a card up his own sleeve. His months of being knocked

A Thumb in the Dike • 269

around by Washington pros had taught him that he wasn't going to make any
friends in this job anyway and hardball was the only way to play the game if
you wanted to win.

"Okay, Connie." Gray said when she finished her speech. "Then I'm trans-
ferring the examiners to the district banks."

Horner was stunned. What Gray was proposing to do was to transfer re-
sponsibility for all future thrift examinations and supervision from Wasiiington
to the 12 district banks across the country. The district banks, although an-
swerable to the Bank Board in Washington, were independent entities, owned
and operated by the thrifts within their district. " The FHLBB had oversight over
the 12 district banks, but the OMB did not. hi making such a transfer Gray
would remove any authority OMB had over the number of examiners the FHLBB
had or how much they were paid.'-

"You mean you're going to have nongovernment employees regulating?"
Horner gasped.

"They're already doing it," Gray said. "I don't see a problem with it."

Horner, Gray recalled, just glared at him across the remnants of lunch.
Although decentralization of federal government was one of the goals of Rea-
ganomics, transferring 700 federal examiners away from the interfering hands
of the White House and Congress was something else.

"Well, I've got to get back to the office, Connie. Thanks for the lunch."
Score another one for Gray.

A week later Horner trooped into Gray's office at the Bank Board, her eight
assistants in tow. "I'll offer you a deal, Ed," she snapped, sitting herself down
at a large dining-room table Gray had had brought to the office for such meetings.
The table sat only six comfortably, so Horner's staff had to squeeze in around
the edges. "If you agree not to transfer the examiners to the district banks, I'll
give you 39 new ones," Horner said, as though she were making a major arms-
control proposal.

Gray was flabbergasted. He looked around the table at the blank expressions
on the faces of Horner's staff. Finally, running his hand through his thin gray
hair, Gray told her it was a deal he simply could not make.

"Really, Connie, I need 1,100 examiners," he insisted.

As soon as Horner and her minions trooped off. Gray, his general counsel.
Norm Raiden, and his chief of staff, Ann Fairbanks, finalized the transfer of
the examiners to the district banks. The move, effective July 1985, greatly
strengthened the district banks and got Washington bureaucracy out of their
lives — two things the industry liked. Gray told the district banks to begin making
arrangements to bring on board at least 700 new examiners immediately and to
raise starting salaries from the current $14,000 to a more competitive $21,000,"
The transfer of examiners was accomplished just at the hme that Centennial
Savings and Consolidated Savings were teetering on the brink.

270 • INSIDE JOB

If Gray's end run around OMB made him some new friends outside Wash-
ington, it did nothing for his standing on Capitol Hill or for the congressmen's
vocal thrift constituency. The last thing in the world Don Dixon and his kind
wanted was more examiners. To their mind there were too many regulators
poking their noses into thrifts' books already. Those S&L owners, heavy con-
tributors to congressional and senatorial candidates, renewed their call for Gray's
ouster. First he had attacked brokered deposits, the lifeblood of the industry,
then he had limited direct investments and growth, and now he was sending
700 more examiners into the field. He also was insisting that supervisors on the
district level issue supervisory agreements and cease-and-desist orders more firmly
and promptly. He was very unhappy with what seemed to him to be a lax
enforcement of his new regulations. '■*

In the midst of the intramural skirmishing Gray was making regular trips to
Capitol Hill to answer questions from angry congressmen on various committees.
He and his general counsel. Norm Raiden, took a particularly tough grilling in
July before a House subcommittee'' investigating the failure of Beverly Hills
Savings in April. Before Raiden had become general counsel for the FHLBB
he had been an attorney with the Los Angeles firm of McKenna, Connor and
Cuneo (one of the top S&L law firms in the country), and he had represented
Beverly Hills Savings during the time that Beverly Hills management was making
insider loans and speculative investments.'*' Congressmen accused Raiden of
"severe and extreme conflict of interest" in his handling of the Beverly Hills
case after he became counsel for the FHLBB. Gray defended Raiden (and kept
him in his post), and Raiden denied any conflict of interest.'"

Representative Thomas A. Luken then called Gray on the carpet for not
acting sooner against Beverly Hills, saying "Mr. Gray is following an Alice-in-
Wonderland approach" to thrift problems. He said the FHLBB "lacks the in-
centive to take aggressive action."

Gray replied that "a very important contributory factor" to the lack of time-
liness in dealing with Beverly Hills was a shortage of examiners, which had now
been corrected by transferring them to the F"HLBs.

Luken then demanded that Gray "do the decent thing and resign" because
he had implied that he couldn't do the job with the personnel he had.

Representative John D. Dingell (D-Mich.), chairman of the subcommittee,
came to Gray's defense, saying that it was "a national disgrace ' that the Bank
Board lacked the funds to have a sufficient and prop>erly trained examination
force. Dingell, on several occasions during the hearings, characterized Gray as
"an honorable man, " but he denounced Raiden for his failure to stop the abuses
at Beverly Hills when he was the thrift's attorney. '*

In other appearances on Capitol Hill, Gray testified on the worsening con-
dition of the industry' insurance fund, the FSLIC. The insurance fund. Gray
said, did not have enough money left to close all the insolvent thrifts. He

I

A Thumb in the Dike ■ 271

projected tluit the cost would run into tlic billions of dolhirs. In July lie testified
the FSLIC would need $15 billion to clean up the industry. His numbers were
based on a report by Bank Board economist Dan Brumbaugh. Congress was
stunned. Where would the industry get that kind of money?

Gray was at such a hearing when his driver tiptoed into the hearing room
and whispered in his ear. "Sir, there's an urgent call for you on the car phone."
It was Bank Board member Mary Grigsby. She asked Gray to call her back on
a regular phone. She didn't want to discuss this matter on the car phone where
it could easily be monitored by any ham radio operator.

When he returned to the office he called Grigsby.

"Ed, I just got a phone call from someone representing a sukstantial Cali-
fornia savings and loan," she said. "They want to offer you a job."

"Who?" Gray asked, wondering who thought he might be available. Spec-
ulation was always floating around Washington that he was leaving office, but
he had denied all the rumors.

Grigsby didn't want to be more specific over the phone. Gray said he'd be
available to chat later that afternoon, and he set a time for Grigsby to meet him
at his office. When she arrived she told him just who the suitor was. It was
Charles Keating, )r. , of American Conhnental Corporation (which owned Lin-
coln Savings and Loan in Irvine, California), a leader of the chorus that was
singing for Gray's removal.

The offer stunned Gray. He knew regulators were crawling all over Lincoln's
books and complaining that Lincoln was in gross violation of his new direct
investment regulation. Lincoln was one of Gray's nightmare thrifts. (Lincoln
grew ft-om $2.2 billion in deposits in 1984, when Keating's company acquired
the thrift, to $4.2 billion by 1987, and some of that money was invested in high-
risk junk bonds.) In 1985 regulators said Lincoln had only $54 million in
passbook accounts and $2. 1 billion in large CDs.

Gray told us he consulted Bank Board general counsel Norm Raiden on the
Keating offer. "He wants to get you out of the way," Raiden told Gray. The
offer had been a vague one, so Gray sent Ann Fairbanks to a breakfast meeting
with Keating to verify that this was a real offer. She came back and said that it
was, though later Keating denied ever making such a proposal, just what Keating
might have been prepared to pay Gray was never disclosed. Executives at Amer-
ican Continental Corporation were very well paid. Keating, who earned $1.9
million in bonuses and compensation in 1987 as head of American Continental,
was reportedly the second highest-paid executive in the thrift industry. Three
other American Continental executives, including Keating's son Charles Keating
III, were among the ten highest-paid industry executives. Keating the III made
$863,494 in 1987. Another son employed by Keating's American Continental
Corporation was Mark Connally, son of the powerful former Texas Governor
John Connally.

272 ■ INSIDE JOB

Keating, with palatial estates in Arizona and the Bahamas, private jets and
helicopters, was rich beyond Ed Gray's dreams. He had a reputation as an anti-
pornographer and a philanthropist, and one of his favorite charities was politi-
cians. He also encouraged his friends, employees, and business associates to
contribute. Keating knew no political party. His largesse flowed equally to Dem-
ocrats and Republicans alike.

Though now head of a multibillion-dollar thrift empire (Lincoln Savings
made up about 85 percent of American Continental Corporation's assets), SEC
documents revealed that in 1979 Keating had been accused by the Securities
and Exchange Commission of misusing bank funds in Ohio by lending $14
million to friends and associates between 1972 and 1976. The SEC alleged that
Keating, Carl Lindner, and Donald Klekamp, all officers of American Financial
Corporation of Cincinnati, used Provident Bank, which American Financial
controlled, for their own benefit. They accused the three men of a long list of
SEC violations, including permitting Provident Bank to make loans to them
without collateral, extend them new loans to cover the interest they owed on
the old loans, roll over loans as they matured without demanding payment, and
guarantee loans that other banks had made to Keating and others.

Keating and two associates consented to the SEC judgment without admitting
or denying the allegations in the SEC complaint. After reading the charges, and
even knowing that the SEC never had to prove them in court, we still wondered
how Keating later got control of a thrift. In late 1988 published reports revealed
that Keating, through American Continental, had gotten caught up in another
SEC investigation, this one centering around MDC Holdings Inc. (a major
borrower at Silverado Savings in Denver and an associate of a Southmark sub-
sidiary), and that the SEC was investigating American Continental's accounting
methods.

Gray said he turned down Keating's job offer without ever talking to him.
When a reporter from the National Thrift News called Keating and asked if he
had tried to hire Gray away from the Bank Board, Keating simply said. "No.
That's all I have to say at this time. Good-bye." Click.

Though Gray turned Keating down, he was thinking that it was time for
him to keep his promise to his wife and bow out of the Washington scene. After
all, he'd already stayed on several months longer than he had meant to. But he
had no intention of being forced out. He was determined to orchestrate his own
departure from public life. But his enemies were impatient, particularly Don
Regan, who now decided it was time to put the pressure on Gray again. He
knew Gray was on the outs with a lot of people in the industry, most recently
because Gray had told them the insurance fund was down to $? billion in
reserves to cover $1 trillion in deposits and member thrifts were going to have
to set aside 1 p)ercent of their assets to make up the shortfall.

That news was a sour pill that thrift officers did not want to take, and Regan

A Thumb in the Dike • 273

seized tlic moment to leak to The Wall Street jounial the "news" that Gray was
resigning. It was Regan's way of saying to Gray, "Here's your hat. What's your
hurry?" It was also no secret that Regan wanted his old friend, former stock
exchange president James Needhain, in Gray's place.

When reporter Monica Langley of The Wall Street journal called Gray for
comment on the rumor that he was resigning, Gray was stunned.
"I am?" he said. "I think I'd know if I was resigning."
Langley told Gray she had gotten the news "from the highest possible au-
thority."

"You mean the president?" Gray asked, half fearing the answer.
"No," Langley responded, but a very high source.
Ah, Gray thought . . . Don Regan. Gray was tired and mad.
"No, I'm not resigning," he told Langley, and he hung up the phone. At
that moment Gray knew he was going to have to break that promise he kept
1 renewing to his wife that he would retire soon. He was staying on.
i The decision brought with it more than personal hardship. It meant financial
: hardship as well. Gray's $79,000-a-year salary was quickly eaten up by the cost
of living in Washington and maintaining a home base in San Diego. He also
had two daughters in college. Gray said he took out small personal loans from
; Washington banks to support himself. He even borrowed from his mother. (By
the time he left the Bank Board his personal loans exceeded $80,000, Gray said.)
He chaffed at the thought of having to scrape and beg while people like Don
Dixon and Ed McBirney and Gharles Bazarian lived the life of Reilly.

But once again Ed Gray had outfoxed the Washington pros. One could
I almost hear the sighs of frustration when they read Gray's remarks in The Wall

Street Journal: "Resigning? Why no. I'm staying on."
: A week later White House spokesman Larry Speakes reaffirmed the admin-
istration's support for Gray. "Ed Gray can stay as long as he wants," Speakes
\ said.

By the time 1985 rolled to a close it looked to Gray as though he might
finally have turned the corner. They'd passed the regulations to curb direct
investments and growth, and they'd gotten more examiners in the field — major
accomplishments that should at least hold the high fliers in check while regulators
and law-enforcement officials mopped up the damage that had already been
done. As Gray flew out of Washington to spend the holidays with his family in
San Diego, he felt the first optimism he had enjoyed in months. He sat back
■ in his seat and watched from the window as his plane left Washington — and
the thrift crisis — behind. He thought maybe the worst was over.

CHAPTER TWENTY-THREE

The Touchables

While officials at the Federal Home Loan Bank Board in Washington caught
their breath, enjoying what they did not yet realize was simply a lull before
another storm, pressure was building down the street at the Department of Justice
to pay more attention to the thrift industrv'. But they were no more prepared to
handle the thrift crisis than the FHLBB had been — and for many of the same
reasons.

The Department of Justice was understaffed. FBI special agents and U.S.
attorneys in field offices around the country were battling a war on drugs that
had already stretched them far beyond their resources. It took awhile for them
to realize how many swindlers had infiltrated the thrift industry, and once they
did they found they were woefully short of FBI agents and U.S. attorneys with
accounting backgrounds who could unravel the paper trails of sophisticated bank
fraud. Regulators who contacted the FBI for assistance were often put on hold
— literally.

"I had to phone the Los Angeles FBI office 17 times trying to get them to
open a case when North American Savings and Loan failed," California Savings
and Loan Commissioner Bill Crawford complained later. "After 17 calls an
agent finally returned my call and told me. "Look, if you're telling mc that North
American is more important to you than Consolidated Savings and Loan, I'll
drop my Con.solidated investigation and come right over.' " If not, he said, he
could get around to North American in about two years. '

Particularly in hot spots like Texas and California, the FBI simply did not
have enough agents to investigate all the thrift fraud cases. In 198? the FBI had
only 258 agents assigned to bank fraud investigations, and within a year they
would have over 7.000 cases to investigate. Three years later there would be
only 337 special agents to investigate what by 1987 would increase to over 1 1,000
cases. To make matters worse, bank fraud was an incredibly complex white-

274

The Touchables ■ 275

collar crime. Each major case took from two to four years to investigate and
prosecute. The FBI just didn't have tlie manpower. In San Francisco, for ex-
ample, the FBI's white-collar crime unit had only ^4 FBI agents to handle not
unlv bank fraud but also drug-money laundering, corruption of public figures,
and espionage. Fart of their district ( 1 "> California counties from south of Mon-
terey to the Oregon border) included Silicon Valley, which was waist-deep in
spies try ing to get information on nearly $7 billion a year in Defense Department
projects, rhe head of the San Francisco FBI office told us he needed nearly
twice as many FBI agents (60) for his white-collar crime unit.

Even if the FBI had the manpower, the I'nited States attorneys' offices did
not have enough assistant U.S. attorneys to take the cases to court. When an
assistant U.S. attorney took on a major thrift fraud case that attorney was lost
to the department for up to two years. The cases were backbrcakers and budget
busters. To make matters worse, there was a lot of turnover in U.S. attorneys'
offices. Assistant U.S. attorneys could earn about $70,000 a year prosecuting
federal cases for a few years and then retire to the private sector, where they
could earn twice (or three times) as much representing the crooks.

But something far more damaging than lack of manpower was undermining
the Department of Justice's response to criminality within the thrift industry.
The biggest threat to the proper prosecution of these cases — and the hope of
deterring further such abuses — was the thrift and bank regulators' penchant for
secrecy. Ironically, the best accomplice that thrift crooks had after they were
discovered was the federal regulators, who secreted away the evidence of the
crime and sat on it.

On an increasingly regular basis, starting in 1985, FBI agents around the
country saw thrifts in their jurisdiction being seized by federal regulators. Insiders
or informants would tell them of massive fraud at the failed thrift, but regulators
were referring only a handful of the cases to the ¥B\. The agents wondered why
their phones weren't ringing off the hook. The Bureau contacted Federal Home
Loan Bank officials and asked why they had not reported these alleged crimes
to the FBI. The answer they got could have come right out of a Kafka novel.

"We can't discuss these cases with you," they were told. "That would be
against the law."

The law the regulators were referring to was the Right to Financial Privacy
Act, which Congress passed in 1978. It mandated that a person's business with
a financial institution was privileged, like his business with his doctor, attorney,
or priest. Regulators told FBI agents that, yes, many of the thrift failures had
been caused by insider and customer fraud, but the law forbade regulators to
discuss any thrift's relationship with any customer (which regulators interpreted
as meaning even fraudulent relationships). And, no, they wouldn't be in a
position to supply the agents with any evidence to help them in their investi-
gations. That meant there could be no investigation because when the FSLIC

276 • INSIDE JOB

seized an institution it sucked up every atom of information on the spot, and
immediately it all became as secret as plans for the stealth bomber. Without the
evidence that was in the regulators' possession, no United States attorney could
hope for a conviction of a bank swindler. He needed those phony appraisals,
postdated documents, fraudulent financial statements, endorsed checks.-

The problem wasn't a new one. The Bureau had had earlier problems with
banking regulators over the same issue. After the collapse of the Butcher brothers'
banks in Tennessee in 1983, the FBI actually had to complain to a Senate
subcommittee to get FDIC regulators to release the phony loan documents they
needed to convict the brothers. The regulators fought the justice Department
every inch of the way, leading The Wall Street Journal to wonder in an editorial
if regulators might be worried less about bank secrecy than they were about what
the documents said about their own ineptitude.

"Since the FDIC was the main agency keeping watch over the Butchers'
banks, its documents afford the best picture of what went on. But ever>' time its
files have been subpoenaed it has asked the court for a sweeping protective
order. . . . Similar cover-ups blanket a multitude of other cases, including one
in which the defendants contend the plaintiff FDIC sought the protective order
to 'hide its own culpability.' " .',

Concerned that serious white-collar criminal investigations involving the
theft of hundreds of millions of dollars were going nowhere while FBI agents
fought with federal regulators in public over scraps of information, the Justice
Department in December 1984 had called for a sit-down with regulators. To-
gether they formed a joint working group to which they gave a $50 name: "The
Attorney General's Interagency Bank Fraud Enforcement Working Group. " The
group's mission was to mesh the needs of prosecutors, FBI agents, and bank
supervisory personnel and to "identify, address, and resolve issues of major
significance relating to the detection, reporting and prosecution of bank-related
crimes, focusing especially on crimes by insiders of financial institutions."'

The justice Department began to teach bank examiners how to spot bank
fraud, and the P"BI began work on a computerized tracking system that would
contain the names of known bank swindlers. When crooks moved from one FBI
jurisdiction to another, agents could just type in their names and get a complete
history on them. Unfortunately that system was not scheduled to go on line for
several years.

Regulators were told in no uncertain terms that the Right to Financial Privacy
Act in no way prohibited them from releasing information to the FBI on susf)ected
criminal activity at a financial institution. They were provided with criminal
referral forms and told to file one anytime they had suspicion of a crime. But
old habits died hard. To a regulator financial information was as sacred as the
Holy Sacrament was to a priest. One just didn't hand something that precious
to the uninitiated, the great unwashed — and particularly not to ham-handed

The Touchables ■ 277

FBI agents with lumps under their coats. Agents were still required to get a
federal court subpoena for anything they wanted from regulators.

An example of passive-aggressive behavior by Bank Board examiners was
their "redacted" criminal referral, which satisfied the letter of the law while
totally avoiding the spirit. One veteran I'Bl agent recalled his first run-in with
a redacted criminal referral.

"You would not believe it. It read kind of like this:

Loan officer A made a loan to borrower B. Borrower B supplied fraudulent
financial information on the loan application. Loan officer A knew the
information to be false. Appraiser C supplied an inflated appraisal on the
property. He and Borrower B and Loan Officer A knew the appraisal was
false. When the loan was funded Borrower B paid Loan Officer A and
Appraiser C $25,000 kickbacks out of the loan proceeds.

"I called that character [the examiner] back and asked him just what he
expected me to do with this piece of shit. I told him I couldn't investigate people
with code names, that he had to put their real names in the referral. What the
hell did those clowns call us for? They wanted us to investigate someone but
they wouldn't tell us who?" (The FHLBB is the only agency in government that
employs redacted criminal referrals.)

Secrecy at the 12 district banks became an obsession and got even worse
after Danny Wall succeeded Ed Gray at the FHLBB. If we called to speak with
Bill Black or Mike Patriarca at the San Francisco Bank, at least one "listener"
would stay on the line to make sure Bill or Mike didn't spill any unauthorized
beans. Black, before Danny Wall took over as FHLBB chairman, was well known
to Washington reporters for his good rapport with the press. However, once Wall
became chairman that changed. Black reportedly wrote a memo to Wall criti-
cizing the FHLBB's new Southwest Plan (Wall's much-ballyhooed answer to
the S&L crisis in Texas that called for selling bankrupt thrifts), which was costing
the FHLBB billions of dollars.^ Wall, according to former regulators, put Black
on an informal muzzle, threatening to fire him if he criticized FHLBB policy
again. Wall brought in the FBI as a consultant to help the agency keep a lid
on information. He hired a security officer to track leaks. This Nixonian paranoia
reached its peak when Wall's chief of staff recommended that the FHLBB offer
a $20,000 reward for anyone who could turn in a leaker. (Wall decided against
the plan.) Washington columnist Jack Anderson reported that the year after Wall
took office he convened the FHLBB for only three public meetings but held at
least 70 meetings behind closed doors.

Such secrecy inevitably raised suspicions that the regulators had something
to hide. We began to wonder why we never found a single instance where federal
regulators had filed a criminal referral against one of their own examiners. Were

278 • INSIDE JOB

1
we to believe that, while crooked thrift officials were busily bribing appraisers,
accountants, and contractors, and receiving kickbacks and bribes themselves,
not a single $14,000-a-year FHLB examiner ever took a bribe to cover up?
Regulators said no, but we began to hear differently. One California examiner
was quietly fired by the San Francisco FHLB after it was discovered he had
received a $6,000 check from a crooked thrift officer. In Texas an officer of a
failed thrift actually let a grand jury charge him with perjury rather than repeat
to the jur\' what he had already told hvo different FBI agents three times in
different interviews: Two days before he was subpoenaed to appear before the
grand jury, an employee of the FSLIC whom he had known for years had called
and told him to "get dumb" if it came to testifying before a federal grand jury.
Still, not until 1989 did we find a single FHLB examiner or supenisor charged
with wrongdoing.

Then the facade began to crack. We learned that the FSLIC had hired Stuart
Jones in Washington to help dispose of Texas S&L assets while he was reportedly
being investigated by the FBI in Dallas for alleged criminal wrongdoing at
Richardson Savings in Dallas, which had collapsed. Jones was a commercial
loan officer at Richardson until he was fired in March 1986. The National
Thrift News reported that the FHLB in Dallas had filed not one but two criminal
referrals on Jones, both of which the FSLIC was blissfully unaware.

A couple of weeks later the FBI arrested twin brothers Philip and Thomas
Noons and charged them with defrauding the FSLIC while employed by the
agency to help liquidate insolvent Mainland Savings in Houston. The men were
charged with setting up a complex web of offshore banks to acquire assets of
Mainland at below-market value. They pleaded not guilty and their trial was
pending at press time.

Then the FHLBB announced it had asked the Justice Department to in-
vestigate charges that the former head of the FSLIC, Stuart Root, had given
Silverado Savings in Denver (where Neil Bush had been a director) advance
warning that regulators were going to seize the thrift in December 1988. Root
denied the charges.

These were all just allegations. No one had pleaded guilty or been convicted
by a jury at this writing. But this cascade of allegations in early 1989 reinforced
our own suspicions that all the confusion and sense of urgency surrounding the
faltering thrift industry might become fertile ground for a second wave of thrift
fraud, this time perpetrated by the very people sent to save the industry.

Apparently we weren't alone in our concerns. In mid- 1 989 we learned the
FBI had spent over $1 1,000 flying two suspected Texas thrift swindlers around
the country. According to court testimony, the pair met with important elected
and appointed officials in Washington under the guise that the hvo men wanted
to acquire troubled Texas thrifts. The FBI wired them and recorded the con-

The Touchables ■ 279

versations. In all, 38 hours worth of body tapes were collected by the pair. While
in Washington meeting with congressional aides, the pair met in June 1988
with none other than FHLBB Chairman M. Danny Wall, a meeting they said
had been arranged for them by Texas Senator Phil Gramm. Wall later confirmed
the meeting. When the San Antonio Light ran a story that Wall was a subject
of an FBI probe, the FHLB and the Justice Department vehemently denied
Wall was a target. The tapes were put under court seal when the U.S. attorney
argued that their release could jeopardize the probe. At press time precisely what
that probe involved remained under wraps.

Secrecy at the FHLBB succeeded for a long time in keeping the public from
finding out that fraud was rampant at S&Ls. Occasionally someone on the inside
would speak out, but that was rare. In January 1987 William Weld, assistant
attorney general and head of the Justice Department's criminal division,' said
in a speech to the American Bar Association: "... both FBI and [F'DIC] figures
confirm that a large percentage of bank failures involve allegations of criminal
misconduct on the part of the bank's senior management. . . . We have even
got organized crime types taking a look at thinly capitalized financial institutions
which are candidates for takeover, and then using (various specified fraudulent
schemes] to create a paper financial asset which they can then pull the plug on
after a year and a half or two, and leave the FDIC or FSLIC, i.e., the taxpayers,
holding the bag. . . . Insider fraud thus obviously plays a major role in bank
failures, and we now have evidence to suggest a nationwide scheme linking
numerous failures of banks and savings and loan institutions throughout the
country."

Unfortunately Weld's words didn't get much attention (we didn't hear about
them until 18 months later), and regulators continued to play the secrecy game.
In late 1988 we called the San Francisco FHLB to ask about complaints we
were still getting from FBI agents that they weren't receiving criminal referrals.
A public relations person took our message and said she'd have an official call
us back. Half an hour later she told us the official was "not comfortable talking
to you about this."

We did talk later, but only after we told the PR person that we already had
the FBI side of the story and if the FHLB didn't want their side presented, we
were "comfortable" with that. Then we were invited to a meeting with the Bank's
criminal referral staff. At that meeting we were told that, indeed, the regulators
had "fouled things up in the past" when it came to timely criminal referrals and
providing information to the FBI. But since April 1988, they said, a new system
was in place and the machinery was functioning much better. They, in turn,
now criticized the Justice Department, saying that many cases referred to the
FBI were not being prosecuted. Congress released the results of a confidential
internal FBI audit that painted a bleak picture of the FBI's ability to investigate

280 • INSIDE JOB

sophisticated financial crimes. Some federal prosecutors, the report said, were
giving their bank fraud cases to IRS agents or Secret Senice agents to investigate,
and some were going so far as to hire outside accountants to do the sleuthing.

Criminal referrals remained the chafing point between the Justice Depart-
ment and thrift regulators. But ci\il suits that the FSLIC filed against thrift
abusers, to tr\ to reco\er some of the FSLIC's dwindling fund, were another
important stumbling block in the complicated task of bringing criminal charges
against thrift looters, though regulators would never admit it. When a thrift
failed the FSLIC hired a high-powered private law firm to represent its interests
against the thrift's former management and customers. Those attorneys were
called "fee counsel" because the FSLIC paid them a fee for their services — a
fat fee. In a short 18-month period between January 1986 and September 1987.
the FSLIC reported it paid out a sta^ering $108 million in legal fees to inde-
pendent fee counsel working on thrift failures nationwide (prompting one at-
torney to suggest they rename the Garn-St Germain Act the Lawyer's Relief Act
of 1982).

Fee counsels' job was to figure out how the thrift's assets had disappeared
and to go after them. They sued thrift officials who were guilty of self-dealing
and borrowers who had defaulted on their loans. And they had no interest in
seeing those people arrested because the accused might start squirreling their
money away to pay for criminal attorneys and say they didn't have enough
money to pay the civil judgment. Fee counsel complained further that when
they filed a criminal referral, FBI agents flashed badges in the faces of their ci\il
defendants, scaring them, and ever>one immediately clammed up. Defendants
being deposed in a civil case would suddenly start taking the fifth amendment
on the grounds that a criminal investigation was under way and anything they
said in the civil action might be used against them in the criminal case. For
these reasons many fee counsels just counted to ten whenever they were tempted
to file a criminal referral and kept counting until the temptation went away.
The issue became one of priorities: Was it more important to collect the missing
money or punish the offenders?''

At the FHLB in Topeka we ran across a prime example of regulators' re-
luctance to make criminal referrals to the FBI. After discovering what appeared
to be fraud at SISCorp, an Oklahoma thrift servicing company heavily influenced
by Charles Bazarian, attorneys met with Kermit Mowbray, president of the
Topeka Federal Home Loan Bank, to advise him of their findings. A transcript
of the meeting included the following exchange:

"I can't minimize what I feel to be suspicions of criminality . . ."an attorney
told Mowbray. But, apparently concerned about the conduct of pwssible civil
proceedings, he quickly added, "I think if there was a stampede now by certain
investigating agencies, I wonder if it wouldn't set off somewhat of a situation
where people would become immobilized.

The Touchables • 281

"For example, if we called up the FBI . . . they're hot on white-collar crimes
anyway. And that if the FBI was to hit the streets and investigating who knows
... I wonder if it would help or harm in the short term . . . everybody retreating
into a very defensive posture and not saying anything to anybody without four
lawyers and a monsignor present."

Mowbray replied, "I'm not sure that we need that. We usually do not call
the FBI in until we have done our own investigation."

"Well, that's fine," the lawyer replied, apparently satisfied that no ham-
handed FBI agents would be muddying his civil waters.

The end result of the strained relations between regulators and the Depart-
ment of Justice was clearly visible in the numbers. Fven as late as 1987 (three
years after the working group's formation) the San Diego division of the FBI
would be working on only nine bank fraud investigations in the $100,000 to
$250,000 category (a category large enough to exclude garden-variety embez-
zlements). None of those investigations was referred by the FSLIC or the
FDIC. Two were referred by the district attorney, two by an FBI informant, and
two were started after agents learned of alleged bank fraud while reading the
morning paper over coffee. The other three referrals also did not come from
regulators.

In Los Angeles in 1987 the federal prosecutor would receive 78 criminal
referrals in cases involving losses between $100,000 and $250,000. None of those
cases was referred by the FSLIC. Informants referred seven of the cases and
seven more were initiated by the FBI on its own after it stumbled over information
while investigating unrelated crimes.

In eases where the loss exceeded $250,000 nine investigations were initiated
in the San Diego division, and none of those was referred by the FSLIC. In
Los Angeles 14? criminal referrals were filed in the $250,000-plus category, of
which the FSLIC was responsible for only five.

When regulators did make criminal referrals and forked over supporting
documentation, the Justice Department often refused to keep them informed of
the progress of the case (or to give them the information the FBI gathered that
might help the P'SLIC locate some of its missing money) and prosecutions were
uneven, depending entirely upon the individuals called upon to handle the case:
the FBI agent, the U.S. attorney, the judge, and the jury. If an FBI agent
pursued his suspects with vigor and collected all the necessary information to
support an indictment, he then had to "sell" the case to an assistant U.S. attorney
who would decide whether or not to prosecute the case. The system worked best
when there was a team of an FBI agent and a U.S. attorney who were both
dedicated to the prosecution of the ease, like U.S. Attorney Joe Cage and FBI
Agent Ellis Blount in Louisiana (Herman Beebe) or U.S. Attorney Lance Cald-
well and FBI Agent Joe Boyer (State Savings/Corvallis) in Oregon. But those
were the rarest of exceptions. (In late 1988 a congressional report stated that 60

282 • INSIDE JOB

cases in which the FBI in the Northern District of CaHfomia had completed its
investigation had gone unproseciited.)

Iftht U.S. attorney gave the go-ahead to prepare evidence for a grand jury,
and (/the grand jury handed down indictments, the U.S. attorney had another
chance to decide how much he believed in his case. Could he spare the long
months it took to prepare for trial? And then the weeks in court? If the answer
was no, the U.S. attorney would dispose of the defendants one by one by offering
them relatively light sentences or even probation in exchange for a plea to one
count of bank fraud. For the U.S. attorney's career scorecard a plea bargain
counted as a conviction, just as if he had sent the crook up the river for 20
years.

But suppose the U.S. attorney decided to bite the bullet and take the case
to court. Then he and the FBI agent faced the tedious work of building a case,
and they nearly always did so by reinventing the wheel. The fraternity of high
fliers and professional white-collar criminals who looted thrifts seldom confined
their efforts to one financial institution. Yet FBI investigators rarely looked
beyond the thrift in their jurisdiction. Time and again when we asked an FBI
agent about a suspect we were investigating we discovered the agent had had no
knowledge that the same person was under FBI investigation for bank fraud
1,000 miles away. Crooks networked — FBI agents did not. In fact, we found
that reporters like Byron Harris at WFAA-TV in Dallas and Pete Brewton at the
Houston Post were far better informed about the network of major players in
the thrift bust-out game than many FSLIC attorneys, U.S. attorneys, and FBI
agents actually working the cases.

Once FBI agents and the U.S. attorney had gathered their information and
made a case, they had to endure the uncertainty of the outcome. Would a jury
understand the complicated financial deals? Would they understand what a cash-
for-trash deal was, what a land flip was, and how they were used to bilk a thrift?
And if they got a jury to convict, would the judge hand down a sentence tougher
than the prosecutor could have gotten if he'd just plea-bargained at the start?
Every inch of the path, from discovery of the crime through prosecution, was
littered with uncertainty.

Judges and juries had a hard hme dealing with white-collar criminals. White-
collar criminals didn't look like crooks — they looked like businessmen. In more
than one instance we saw them con FBI agents, U.S. attorneys, judges, and
juries. Swindlers are by definition likable folks. They'd be damned poor con
men if they weren't. A few hours with a Charles Bazarian or a Mario Rcnda
had most folks wondering why everyone was picking on them. All too often we
saw people like Beverly Haines and Herman Beebe come before judges who
could not bring themselves to view the defendants as serious criminals. Instead,
they were treated like characters out of some Greek tragedy . . . victims of fate
... in the wrong place at the wrong time . . . choosing the wrong fork in the

The Touchables • 283

road but otherwise fine fellows . . . when in fact they were criminals, plain and
simple. They were swindlers who, when given the chance to make a decision
between right and wrong, freely chose wrong.

"These guys are con men," complained California Savings and Loan Com-
missioner William Crawford during congressional testimony in 1987. "First they
con the banker, then they con investigators, then they con prosecutors, and
lastly they con the judge and the jury."

The odds against the successful prosecution of a bank fraud case were enor-
mous. The vast majority of looters would never .sec a day in jail or ever have to
pay any restitution. Admitting the obvious. Attorney General Richard Thorn-
burgh told Congress in early 1989, "We'd be fooling ourselves to think that any
substantial portion of these assets is going to be recovered."

Sometimes the obstacles came from within the Justice Department itself, as
when then-Attorney General Ed Meese decided to transfer a million dollars to
the department's obscenity unit from the travel budget of the Fraud Section just
when it was beginning to make headway in its investigation of failed thrifts in
Texas. (Meese was on his way out of office, having resigned after questions were
raised about his ethical standards.) Suddenly prosecutors around the country
were told there was no money to have witnesses flown in to testify before the
grand jury and FBI agents were told they could not go to other states to conduct
interviews because there wasn't enough money to pay the air fare. Then in
October 1988 it was announced that, because of budget restraints, the Criminal
Division at the Department of Justice had a hiring freeze in effect and U.S.
attorneys would be cut back by 10 percent in 1989. By the end of 1988 there
were still 128 vacant U.S. attorney positions that would apparently go unfilled.
As regulators began referring more cases the understaffed Justice Department
fell further behind in its investigations and prosecutions. In Chicago the U.S.
attorney between 1985 and 1988 charged 300 people with embezzlement (250
were convicted or pleaded guilty) and 120 cases involving losses of perhaps $100
million were under investigation in December 1988. "Despite that," the U.S.
attorney said, "the bank frauds continue to grow. " In 1989 Thornburg announced
that one-third of the major bank fraud cases were not being pursued because
the Justice Department lacked the resources.

The only solution to this crunch was to filter the flood of fraud cases. U.S.
attorneys' offices in areas like Los Angeles, San Diego, San Francisco, and
Dallas simply established an arbitrary $100,000 cutoff point. If a case under
$100,000 was reported to them, it generally went unprosecuted. In some juris-
dictions a fraud had to exceed $250,000 before the U.S. attorney would even
look at it. One U.S. attorney on the Organized Crime Strike Force told us, "I
think sometimes that I could quit this job and go out and do bank scams. As
long as I kept my take under $100,000 per scam I know I'd never get prosecuted."
In Southern California and Texas, the cutoff became $1 million.

284 • INSIDE JOB

The simple fact remained that whether the mob or just your generic swindler
busted out a savings and loan (or bank), the risk he incurred was ver>' low but
the potential for gain was staggeringly high. If a person was stupid enough to
walk into a thrift and stick a gun in a teller's face, he would get out the door
with a couple of thousand dollars at the most, have his picture taken in the
process, get caught, and spend years in prison, where, for a handful of cigarettes,
he'd become the personal property of the cellblock guerilla. But if he (or she)
pulled a well-oiled loan scam, he would walk out the door arm in arm with the
thrift president, with a check for a couple of million dollars in hand, if caught,
and chances were excellent he would not be, and if convicted, and the odds
were against it, he faced a very small chance of ever spending a day behind bars.
The problem challenges us as a nation. For some reason our system has seen
nothing unjust in slapping an 18-year-old inner-city kid with a 20-year prison
sentence for robbing a bank of a couple of thousand dollars while putting a
white-collar criminal away for just two years in a "prison camp" for stealing
$200 million through fraud.

The average sentence for an executive who defrauds an S&L and gets sen-
tenced to prison is three years, compared to 13 years for someone who sticks up
the same instituhon. Of the 960 jjeople convicted in federal courts of fraud
against lending institutions in one year, only 494 were sentenced to prison terms;
of 795 people convicted of embezzling, only 227 were sentenced to prison terms.
But of 996 people convicted of robbing banks and S&Ls, 932 went to prison.

Even the Justice Department's much-ballyhoocd task force of 50 federal law-
enforcement officers who moved into Dallas in 1987 to investigate S&L fraud
had failed to produce much results almost two years later. They had 25 con-
victions, but most were for minor violations or were the result of plea agreements.
About 25 percent of those sentenced got probation. Hampered by a lack of funds,
most of the attorneys on the task force commuted from Washington to Dallas
a couple of times a month while many defendants seemed to have huge financial
resources and hired teams of high-powered attorneys to represent them.

If Ed Gray hoped that furious prosecution of thrift crooks was going to help
him chase the bandits out of the industry, he was destined for disappointment.

CHAPTER TWENTY-FOUR

Friends in High Places

By 1986 the biggest issue facing Ed Gray in Washington became the growing
insolvency of the FSLIC insurance fund itself All the new regulations and
beefed-up regulatory staff would be for naught if the FSLIC lacked the money
necessary to close and liquidate insolvent thrifts once they were identified. When
a thrift was liquidated all its deposits up to $ 100,000 had to be repaid to depositors.
That money came out of the FSLIC fund. A single medium-sized thrift liqui-
dation could cost the FSLIC half a billion dollars,' and the fund was down to
$2. 5 billion from $6 billion just two years earlier. Gray told Congress, as he
had been doing for a year, that he needed the authority to raise at least another
$15 billion, through bond sales, to cover the anticipated cost of closing all the
rotten thrifts.

In May, Gray sent to Congress a bill that he said would provide up to $25 bil-
lion to deal with the FSLIC's problems. But tiie bill, dubbed the "recap" (short for
FSLIC recapitalization), soon became the hottest political potato in town. At
times it seemed to Gray that everyone was lining up against the bill. Legitimate
thrift owners bristled at the notion that they should pick up the tab- for poorly run
thrifts. They wanted the recap to be as small as possible, $5 billion at the most.

One day, after a particularly grueling session before Congress, Gray ran into
one of the U.S. League's chief lobbyists in the hall outside the hearing room.

"Why are you guys fighting me on the recap?" Gray asked him.

"Listen, Ed," the lobbyist answered, pulling Gray off to one side. "In 1989
we'll have a new administration running things. By that time everyone will know
this problem is so big that the industry can't pay for it. The taxpayer will have
to pay for it then, not the industry." (The U.S. League did not speak for the
entire industry. The smaller, and much less politically powerful. National Coun-
cil of Savings Institutions supported immediate passage of Gray's recap bill.)

The crooked thrift owners, on the other hand, wanted no recap at all. As

285

286 • INSIDE JOB

far as they were concerned the best FSLIC was a broke FSLIC because it couldn't
shut them down. That meant more time at the till and more time to gamble
on hitting it big.

The lobbying against the recap was furious, and the bill was going nowhere
fast. Then once again, just when Gray's credibility was his most potent weapon,
The Wall Street Journal ran a story that examined Grays cozy relationship with
the U.S. League — which was curious since Gray had been fighting with them
now for two years. The story examined the question of the League's "influence
on Gray" and noted that the group had paid some of his travel expenses over
the years. The Office of Government Ethics launched a probe to investigate
whether the League regularly paid Gray's expenses when he traveled to speak at
League functions.' A Washington Post reporter wrote that some of these stories
originated with law firms Charles Keating, Jr., hired to leak reports that would
embarrass and undermine Gray.

It had all gotten to be too much. Soon after the story broke Gray's two board
counterparts, Mary Grigsby and Don Hovde, announced they would be leaving.
Gray knew he would not be allowed much of a hand in picking their successors,
and he also believed Don Regan would seize the opportunitv' to insert two of
the biggest thorns he could find. Those being named as possible candidates did
little to reduce Gray's concerns. Ihere was conservative Democrat George Ben-
ston, who had written a report just 15 months earlier for Charles Keating, Jr.
Benston blamed high interest rates (that thrifts had to pay to attract deposits),
not brokered deposits or direct investments, for the industry problems. Another
possible choice was Durward Gurlee, Texas League lobbyist who had led the op-
position to Gray in Texas. Then there was another Keating loyalist, Lee Hcnkel, a
lawyer who resembled silent movie actor Fatty Arbucklc. Just a week earlier the
National Thrift News had reported that Henkel-related businesses had received a
number of large loans from Lincoln Savings, the thrift that Keating controlled.

In November 1986 the White Hou.sc announced its choices for the two vacant
seats. The Democratic seat on the Board went to Larry White, 43, an economist
from New York University. White was young and bright and didn't seem to have
ties to anyone in particular. Gray was surprised. He had been certain Don Regan
would put someone in that scat to keep an eye on hini.^

The second seat went to Lee H. Henkel. Gray learned that Lincoln Savings
had given Henkel a $250,000 personal loan and had loaned him more than $55
million on real estate projects in Georgia. Henkel's law firm was also employed by
Lincoln Savings. Keating and Henkel, it turned out, went way back together.
They had reportedly met during John Connally's campaign for the presidency in
1980, when Henkel was Connally's East Coast finance chairman and Keating was
the West Coast chairman. The evidence tying Henkel to Keating was so over-
whelming even the U.S. League was embarrassed by the mounting disclosures
and the League came out against his appointment to the Board.

Friends in High Places ■ 287

Gray suspected that since Keating Had failed to liire liini away from the
FHLBB, he was now trying to put his own man on the Board to neuter him.
Henkel's first move did httle to change Gray's theory. Henkel no sooner took
his scat than he introduced a new regulation tliat would grant a sweeping clem-
ency to thrifts that had violated Gray's tough direct investment regulation and
would allow them to keep the investments they had made before the regulation
went into effect. Among the thrifts that would have benefited from Henkel's
regulation was Lincoln.

A federal ethics inveshgator had reviewed Henkel's background, and Henkel
told the investigator he had repaid the personal loan from Lincoln Savings and
had put all his Lincoln-financed real estate projects into a blind trust. The
reviewer had ruled that Henkel's relationship with Keating posed no ethics prob-
lems. However, Senator William Proxmire, the 66-year-old Democrat from
Wisconsin and chairman of the Senate Banking Committee, made it known
that he had major reservations about the Henkel appointment. It had been made
by the president during the winter recess and until now the Senate had not had
time to study or comment on it.' Proxmire reportedly felt Henkel might be unfit
to serve as a FHLBB member because of the potential conflict of interest caused
by the loans he'd received from Lincoln Savings. The senator had also supported
Gray's direct investment regulation and strongly opposed Henkel's new proposal
to amend it. Proxmire announced he'd hold hearings on the Henkel matter.
With Proxmire on Henkel's trail, it didn't appear to Gray that Henkel would be
a board member very long.

Gray's priority at that juncture was to get the recap bill away from Jim
Wright, who was holding it hostage as a favor to his Texas thrift constituents.
The FSLIG insurance fund didn't have enough money to bail out a few small
thrifts with the flu, much less the estimated 400 thrifts that were now functionally
insolvent and just hadn't been so declared. (Regulators coined the phrase "brain
dead" to describe thrifts that regulators were allowing to operate after they became
insolvent simply because there wasn't enough money in the FSLIG fund to close
them and pay off depositors.) The recap had to be passed and fast. Gray's best
estimate was that brain-dead thrifts were experiencing operating losses totaling
$10 million a day.

For months Gray fenced with Jim Wright over the recap. '' Time after time
Wright took Gray to the woodshed for his Texas thrift and developer constituents.

In January 1987 Wright was elevated to speaker of the House. In February
Gray had an aide call Wright to see if the bill would .soon be sent to the floor
for debate. Gray's aide also told the speaker's office that if they needed any
information that would be helpful in moving the recap bill along, please call
and Mr. Gray would go right over. Gray's aide made several such offers in the
days that followed, but Wright's office didn't return any of the calls. At one point.
Gray told us later, his office called Wright every 1 5 minutes for a solid week. At

288 • INSIDE )OB

the end of that week (late Februan') a spokesman for Wright finally returned the
call. Grav was out, so he left a message: "Don't call us. We'll call you."

Later Gray would recall those hectic days with bitterness. "1 have worked
with all kinds of guys in government since 1966. I've seen people who were
honest and straightforward and those who were something else, but I never saw
anything like this. The speaker used his power and influence to bring about
behavioral changes in a regulator. It was an abuse of power and improper. I felt
he was putting us through hoops to do his bidding. I v\ish I had told him off,
but when you have no money left in your fund you do things you would normally
never do. I certainly would not have done what I did, unless I felt it was the
only way to get the recap bill passed."

Wright's chief of staff would later (1988) send the following mind-boggling
rationalization to Banker's Monthly.'

One of the first hints of serious troubles in America's S&Ls came to then-
Majority Leader Wright in 1986. Into his office one day came a young
woman whose husband had lost his job six months earlier. Even though the
family had been making timely payments for eight years and was, in fact,
only two months in arrears, their home was being repossessd.

Looking into the matter, Wright found that this case, like many he would
see later, was the result of a federal regulator's arbitrarily dictating policy to
a savings institution under federal super\'ision. The regulator had ordered
the lender to foreclose on all due mortgages — no delays, no forbearances,
no ifs, no ands, no buts. In this case and several others Wright was able to
help the young couple sa\e their home. They were allowed to work out an
arrangement to get their house payments current once more.

That, after all. is the job of a Congressman. There is nothing unusual or
sinister about a citizen coming to a member of Congress for help. In each
mail Speaker Wright receives a stack of letters from people caught in the
web of an impersonal bureaucracy and appealing for help. In every congres-
sional office it is the same.

TTiis is what makes America the great country that it is. If government should
ever become so remote and so aloof that the plain, everyday citizen has no
influence, no access and no intercessor, then we will have lost our precious
Constitutional right "to petition the government for a redress of grie\ ances. "

The fact remained, however, that Wright intervened, not on behalf of some
poor woman whose husband had lost his job, but on behalf of big campaign
contributors who had lost (or were about to lose) their savings and loans, men
like Tom Gaubert, Don Dixon, and Craig Hall. Hall had had half a billion
dollars in troubled debt at thrifts when Wright exerted pressure on Gray to get
Hall some forbearance.

I

Friends in High Places • 289

By the end of Fcbruiiry the burgeoning savings and loan erisis was making
news. Washington reporters began asking Speaker W'riglit daily about the recap
bill and why it wasn't moving. The break in the impasse came on April 27,
1987. when the FSLIC filed a civil lawsuit seeking $S40 million in damages
from Dixon and six other former Vernon officers, the largest such claim the
agency had ever filed. The next day Wright announced he would support the
$15 billion version (Gra\'s current version) of the FSLIC recap bill. But he
continued to p)eddle influence for his I'exas thrift constituents and was eventually
successful in getting a forbearance provision added to the recap bill, a provision
that instructed regulators to grant forbearance to thrifts whose problems were
determined to have been caused by temporary economic conditions. Gray blasted
the forbearance provision, sa\iiig it would hamstring regulators.''

In May, after intense lobbying by the U.S. League for a smaller $5 billion
recap bill, the House passed a $5 billion recapitalization plan'' and the Senate
passed a $7. 5 billion version. A conference committee began the process of
reconciling the two versions of the bill.

Two months before the end of Gray's term, which was scheduled to expire
in June 1987, things finally started to break his way. His old nemesis at the
White House, Don Regan, ran into a buzz saw named Nancy Reagan and was
sent packing. '" Though no one could have imagined it earlier. Gray had actually
outlasted Regan. To sweeten Gray's victory Regan had learned that he was
"retiring" while watching a morning news program, after which he submitted
his resignation in a huff. Those who lived by the news leak sometimes died by
the news leak. It was a sweet moment for Ed Gray, whose friends broke out a
bottle of champagne for a small impromptu office party.

Just a week later pressure from Senator Proxmire and rumors that the Justice
Department might probe his relationship with Charles Keating forced Lee Henkel
to resign his seat on the FHLBB, saying he was "fed up with the whole process"
of defending himself against conflict-of-interest charges concerning Lincoln Sav-
ings. Gray thought he just might be able to leave Washington with some scalps
of his own under his belt.

And there was more good news: No action would be taken against Gray for
using expense money from the district banks for his travel expenses. The GAO
and the Department of Justice had conducted an investigation of charges that
he had traveled on FHLBB business and billed his expenses to district banks and
that he had used expense money for golf and yacht outings. Gray had written
a letter to Congress apologizing for his "flawed judgment" and had repaid the
district banks $28,000. ln\estigators reported that using district bank money for
FHLBB expenses would not be tolerated in the future and henceforth could
result in criminal charges, but Gray would not be indicted.

290 ■ INSIDE JOB

Early in April, a couple of days after Henkel resigned. Senator Dennis
DeConcini (D-Ariz.) called. "Ed, can you drop by my office?" he asked.

When Gray arrived at DeConcini's office the senator met him at the door.
Grav had walked into another ambush. Waiting in DeConcini's office were three
more senators; John McCain (R-Ariz.), John Glenn (D-Ohio), and Alan Cran-
ston (D-Calif.). The four men had something in common besides being United
States senators — campaign disclosure forms showed they each had received
healthy political donations from Charlie Keating and his associates. Of the
contributions Keating and his associates had made since 1984, these four men
or their associates had received: DeConcini, $55,000; McCain, $112,000;
Glenn, $200,000; Cranston, $889,000. Each man claimed Keating as his per-
sonal constituent because Lincoln Savings was based in Irvine, California, and
American Continental Corporation, Lincoln's parent company, had been in-
corporated in Ohio and had its headquarters in Phoenix, Arizona.

Suddenly Gra\ felt tired. With only weeks to go as chairman, he was in no
mood for this. In the four years since he'd taken office his hair had thinned
noticeably. His middle-age spread hung over the belt of his trousers. In the early
days as chairman. Gray, with his silver hair and boyish smile, had looked
distinguished, though often tired. Now he looked haggard, like a boxer who'd
taken too many punches.

The four senators wanted to know wh) the examiners from the Eleventh
District FHLB in San Francisco were being so tough on Charlie Keating. The
FHLB wanted Lincoln in line with Gray's new direct investment regulation,
but Keating claimed that the new regulations were the equivalent of changing
the rules in the middle of the game and should not be retroactively applied to
thrifts that had operated under the old rules. (Keating had filed suit in federal
court challenging Gray's regulation. The case was later dismissed.)

DeConcini took the lead: "Look, this is what we'll do. We agree with the
idea that Lincoln not making more home loans is bad. That's what they're
supposed to do." (Prior to Keating's acquisition of Lincoln in 1984. the thrift
had been a heavy single-family mortgage lender. But in 1985 Lincoln originated
only 1 1 mortgages and four were for employees. For a $3.6 billion S&L with
24 branches that was unusual behavior.)

"What do you want?" Gray asked.

DeConcini offered a deal: "We'll assure you that they'll make more home
loans and get into the basic business of home lending if you do something —
you have to withdraw the equity -risk regulations." (Equity-risk regulations re-
quired thrifts that were heavily involved in direct investments to set aside ad-
ditional cash reserves to compensate for the risk inherent in those investments.)

Gray was puzzled. He had four U.S. senators trying to negotiate business
with him on behalf of a .savings and loan. Gray reminded them that Lincoln
was suing the FHLBB over the direct investment regulation. He also offered his

Friends in High Places • 291

opinion tliat it was highly irregular for hini, as FULBB chairman, to be asked
to discuss a savings and loan that was presently being examined by a FULB."
Gray told them it would be impossible for him to withdraw the direct investment
rule.

DeConcini made one last try. He suggested that the regulation be withdrawn
until a court coidd determine if the rule were legal or not.

"If 1 withdraw it," Gray told him, "then they'll just withdraw their suit."
He reiterated. '"I'he rule is very important."

Gray told the senators if they had any more questions about Lincoln to direct
them to Jim Girona, president of the Eleventh District FHLB in San Francisco.
Supervision had been transferred to the district banks, and the Eleventh District
was responsible for whatever examinations were in progress at Lincoln.

A few days later DeConcini called Girona and asked if he and his staff could
come to Washington to discuss "the Lincoln problem. " A meeting was scheduled
at DcGoncini's office for April 9 at 6 p.m.

Girona flew to Washington along with his second-in-command at the San
Francisco FHLB, Michael Patriarca, and Richard Sanchez, the supervisor in
charge of Lincoln's examination. In Washington they picked up Bill Black over
at the FSLIG. He was transferring out to San Francisco soon to be the general
counsel at the San Francisco FHLB.

When the four arrived at DeGoncini's office they found senators DeGoncini
and McGain in attendance. Senator Glenn arrived a few minutes late and Senator
Granston dropped by briefly. Also present was Senator Don Riegle (D-Mich.),
next in line to replace Proxmire as chairman of the Senate Banking Gommittee.
Riegle, like the other senators there that day, had received large donations from
Gharles Keating and his associates ($76, 100 in Riegle's case). Keating had raised
the money for Riegle in March at a fund-raiser attended by over 100 Keating
employees.

The meeting lasted just over two hours. All four regulators and four of the
five senators stayed the entire time. Granston, who had appointments to keep
on the Senate floor, stopped by to tell Girona, "I just want to say that I share
the concerns of the other senators on this subject. " The meeting was confidential.
Bill Black was the only person taking detailed notes, which became an unofficial
transcript of the meeting prepared at Ed Gray's request, and the basis for the
following. (The entire, uncut transcript is reproduced in Appendix B. )

Jim Girona began the meeting by introducing his colleagues from the district
bank. After the introductions DeGoncini got right to the point. He told the
regulators, "We wanted to meet with you because we have determined that
potential actions of yours could injure a constituent." The constituent, of course,
was Lincoln Savings.

DeGoncini said that Keating was afraid the FHLB was going to seize Lincoln
because Keating disagreed with the Bank Board's rules on direct investments. He

292 ■ INSIDE )OB

said Lincoln also strongly disagreed with the Bank Board over appraisals it had
made on Lincoln properties. They were low, way too low, and "grossly unfair."

Senator McCain, from Tempe, Arizona, spoke up to try to put the meeting
into a more benign light. "ACC [American Continental Corporation, head-
quartered in Arizona, was Lincoln Savings' parent company] is a big employer
and important to the local economy. I wouldn't want any special favors for
them. ... I don't want any part of our conversation to be improper. We asked
Chairman Gray about that and he said it wasn't improper to discuss Lincoln."

Senator John Glenn jumped in to complain that the district bank had taken
an "unusually adversary view toward Lincoln." He complained that normal
examinations took up to six months, but the Lincoln exam had dragged on and
on. "To be blunt, you should charge them or get off their backs," Glenn said.

Riegle said the way it looked to him was that the standoff between Lincoln
Savings and the FHLBB had become a "struggle between Keating and Gray. . . .
The appearance is that it's a fight to the death." Riegle added that he just wanted
to make sure the San Francisco regulators were acting in a fair and professional
manner.

Cirona finally spoke up. Contrarv' to rumor, he told the senators, Ed Gray
was not out to get Charles Keating. "We [at the San Francisco FHLB] determine
how examinations are conducted," he told them. "Gray never gave me instruc-
tions on how to conduct this exam or any other exam. At this meeting you'll
hear things that Gray doesn't know."

Cirona then put the senators on notice. "This meeting is very unusual, to
discuss a particular company."

"It's very unusual for us to have a company that could be put out of business
by its regulators," DeConcini shot back. "Richard [Sanchez], you're on, you
have 10 to 12 minutes." (The senators had a vote coming up on the floor.)

Sanchez began presenting the Bank Board's case. "An appraisal is an im-
portant part of underwriting [a loan]. It is very important. If you don't do it right
you expose yourself to loss. Our 1984 examination [of Lincoln] showed significant
appraisal deficiencies. Mr. Keating promised to correct the problem. Our 1986
exam showed the problems had not been corrected, that there were huge appraisal
problems. There was no meaningful undenvriting on most loans. " Sanchez cited
as an example an appraisal redone for the FHLB by Merrill Lynch that corrob-
orated a "significant loss."

DeConcini countered Sanchez. "Why not get an indejjendent appraiser?"

"We did," Sanchez answered. (The FHLB had hired Merrill Lynch to do
the appraisals.)

"No, you hired them," DeConcini replied. "Why not get a truly independent
one or use arbitration if you're trying to bend over backwards to be fair?" (De-
Concini didn't specify how the FHLB might go about getting a "truly independent
appraiser " without hiring one.) The senators broke for a vote on the floor.

i

Friends in High Places ■ 293

When tlic meeting resumed Sanchez told the senators, "Lincoln had un-
denvriting problems with all their investments, et|uity securities, debt securities,
land loans, and direct real estate investments." He said that out of 52 real estate
loans Lincoln made between 1984 and 1986 there were no credit reports in the
file on the borrowers in all S2 cases. Examiners found $47 million in loans
made to borrowers who didn't have adequate credit to a.ssurc repayment.

"They're flying blind on all their different loans and investments," Patriarca
told them.

Glenn asked, "Some people don't do the kind of underwriting you want.
[But] is their judgment good?"

Patriarca replied, "That approach might be okay if they were doing it with
their own money. They aren't. They're using federally insured deposits."

Riegle piped up. "Where's the smoking gun? Where are the losses?"
I "What's wrong with this if they're willing to clean up tiieir act?" added
DeConcini.

Cirona couldn't believe the resistance. "This is a ticking time bomb," he
told them.
! Patriarca's patience had worn thin. "I've never seen any bank or S&L that's
i anything like this," he told the senators. ". . . They [Lincoln's practices] violate
the law and regulations and common sense."

Then he dropped his bombshell. "We're sending a criminal referral to the
Department of Justice. Not maybe, we're sending one. '- This is an extraordinarily
serious matter. It involves a whole range of imprudent actions. I can't tell you
strongly enough how serious this is. This is not a profitable institution. . . . Let
me give you one example. Lincoln sold a loan with recourse [the buyer had the
right to back out] and booked a $12 million profit. The purchaser rescinded the
I sale, but Lincoln left the $12 million profit on its books. Now, I don't care how
many accountants they get to say that's right, it's wrong."

Still fighting, DeConcini countered, "Why would [the accountants] say these
things [that the regulators' exam was inordinately long and bordered on harass-
ment]? They have to guard their credibility too."

"They have a client," answered Patriarca, referring to the fact that thrifts
pay the accounting firms to perform the required annual audits.

"You believe they [private accounting firms] would prostitute themselves for
a client? ' DeConcini asked.

"Absolutely," said Patriarca. "It happens all the time."

The senators left for another vote, then returned.

After some discussion Sanchez said, ". . . [Lincoln has] $103 million in
goodwill" on their books. If this were backed out, they would be $78 million
insolvent."

"They would be taken over by the regulators if they were a bank," added
Patriarca.

294 ■ INSIDE JOB

Cirona told DeConcini that the regulators had tried to compromise with
Keating. "I've never seen such cantankerous behavior," Cirona said. "At one
point they said our examiners couldn't get any association documents unless
they made the request through Lincoln's New York litigation counsel."

Patriarca's comment that he was filing a criminal referral on Keating must
have been still ringing in the senators' ears. They began to soften their opposition.
DeConcini, although still unhappy with the way the FHLB was appraising Lin-
coln's projDerties, nevertheless commented, "Frankly the criminality surprises )
me."

"What can we say to Lincoln?" a stone-faced Glenn asked.

"Nothing with regard to the criminal referral," Black said. ". . . Justice
would skin us alive if |they knew we had discussed it]."

Patriarca ended the meeting by telling the senators, "I think my colleague
Mr. Black put it right when he said that it's like these guys put it all on 16 black
in roulette. Maybe they'll win, but I can guarantee you that if an institution ;
continues such behavior it will eventually go bankrupt." Nine months after this I
meeting the National Thrift News acquired a copy of Black's secret transcript
and broke the story. Shortly thereafter Don Riegle returned the $76,100 in
donations to Charles Keating and his friends, stating that he wanted to avoid
any appearance of misconduct.

Lincoln Savings' attorney commented on the allegations of impropriety' raised
at the meeting: "From what you've told me these are malicious statements based
on false information."

In January 1989 Senator Riegle, now in Proxmire's old post as chairman of
the Senate Banking Committee, appeared on Meet the Press and flatly denied
he'd ever interceded on behalf of Lincoln.

"I did not intervene on behalf of a company [Lincoln]. I did attend a meeting
at the request of other senators who represented the state in which that institution
was. I came as a member of the banking committee to help try to understand
the maze of regularion that is obviously very complex. But 1 took no action on
behalf of that savings and loan or any other at any time."

A year after the meering between the five senators and San Francisco FHLB
representatives, Keating and the San Francisco district bank were still fighting. >
The president of the district bank, Jim Cirona, later told a congressional com-i
mittee that Lincoln Savings had given regulators in Washington a secret file
about him.

"He [Roger Martin, an FHLBB member] told me that he had in his possession
information that was furnished to him by Lincoln that would be very damaging!
to me."

When asked by reporters about the file, Martin at first denied its existence. '■
Then he recanted and said he had indeed had such a file given to him by Lincoln .

Friends in High Places ■ 295

Savings but he had not looked inside it. He said, though, that it was his impression
that the file contained notliing of a personal nature, only more complaints about
the manner in which the San Francisco regulators were conducting their long
examination of Lincoln.

San Francisco regulators completed that examination in May 1987. They
reported what they considered to be substantia! irregularities at Lincoln and they
recommended seizure of the institution. But Danny Wall became chairman of
the FflLBB in June, and Keating complained to him that the regulators at the
San Francisco FHLB were out to get him. He said they had leaked confidential
material to the press to undermine him and his company. Wall prohibited the
San Francisco regulators from moving against Lincoln, histead, he moved the
responsibiiih' for Lincoln's examination and supervision from the San Francisco

, FHLB to the FHLBB in Washington — something that had never occurred in

■: the 50 years of Bank Board history. San Francisco regulators complained that
Wall's action had "crippled" the independence of his examination staff and

i "undercut every regulator in the country."

i When Keating was asked if his financial support influenced politicians to
support his cause, the Orange County Register reported that he told reporters,
"I want to say in the most forceful way 1 can: I certainly hope so."

in November 1987 the FHLBB in Washington initiated its own examination
of Lincoln Savings, which would last for over a year. In 1988 a meeting was held
at the White House with select members of the White Hou.se staff and a handful of
Republican congressmen. One of those attending that meeting said he was as-
tounded to hear a close advisor to the president conclude that the best cure for the
thrift industry was to "keep moving in the direction of the Charles Keatings.
They're the only hope." Keating, however, had different ideas. He decided he

I didn't want to be in the thrift business anymore and put Lincoln up for sale.

Finally even the folks in Washington could not ignore conditions at Lincoln.
The FHLBB completed its examination at the end of 1988 and soon demanded
that Keating relinquish control of Lincoln. He responded by throwing Lincoln's
parent company, American Continental, into bankruptcy on April 13, 1989, and
regulators moved in to seize Lincoln the following day. Keating promptly called a
jdramatic televised news conference in Phoenix and, visibly upset, hands shaking, he
told the citizens of Arizona that their economy would be destroyed if regulators —
whom he described as malicious, politically motivated bureaucrats — brought
Lincoln down (American Continental claimed to employ 2,300 Arizonans).

The same day Danny Wall was forced to admit that San Francisco regulators
had been right about Lincoln, and he confirmed that the Bank Board had made
several referrals to the Justice Department involving Lincoln Savings. He said
;he Bank Board audit had uncovered evidence of assets being shifted from Lincoln
Savings to American Continental and documents being destroyed.

Two weeks later the Orange County Register reported that it obtained a copy

296 • INSIDE JOB

of an FHLBB memo that reportedly accused American Continental of "cooking
the books" to make both it and Lincoln Savings appear healthy and of making
deals with insiders and affiliated companies that cost Lincoln Sa\ ings more than
$100 million.

Company spokesman Mark Connally responded. "1 don't put a whole lot of
stock in anything the Bank Board says. All it is is a lot of hot air and unfortunate
innuendo." As of this writing, Keating was threatening "to challenge in court
those who would destroy us, and [to] call for a full federal investigation of the ,
abusive power by one or more regulator offices."

Regulators said the collapse of Lincoln Savings would cost $2.5 billion.

In )une 1987 Ed Gray cleaned out his desk at 1700 G Street to make j
room for the new chairman, M. Danny Wall — the same Danny Wall who I
in 1982 had helped shape much of what became known as the Garn-St Gemiain
Act when he was staff director of the Senate Banking Committee, and the |
same Danny Wall who had opposed Gray's brokered deposit regulation.
Treasury Secretary James Baker called Jim Wright in Fort Worth to give him
the good news.''' Wall had come to Washington with Senator Jake Garn (R-
Utah), chairman of the Senate Banking Committee, from a savings and loan I
in Salt Lake City and had ser\ed as Garn's chief administrative aide. Bald, j
bearded, energetic, and always impeccably dressed in three-piece suits. Wall!
was more in tune than Gray with the U.S. League: The New Republic reported
that a journalist examining the disclosure statements of top congressional staffers
a few years earlier had discovered that Wall led the pack in lobbyist-subsidized .
junkets — 30 in one year. Wall was obsessed with making certain no unauthorized j
documents leaked to the press. And he stressed the positive side of the S&'L
industry. Over and over he repeated how pleased he was to head an industry in
which "80 to 90 percent of the thrifts were healthy and thriving." He said it was
only a small minority of thrifts that were in trouble and he'd have a handle on
them just as soon as the recap bill passed the Senate (which it finali\ did in
August).

Wall vehemently denied charges that he was systematicalK misinforming
Congress and the American public about the depth of the FSLIC problem when
he projected a $20 billion FSLIC deficit at the same time the General Accounting
Office was estimating the debt to be more like $70 billion and private forecasts
were coming in at over $100 billion. But after George Bush's nomination speech
at the Republican National Convention, Americans might have wondered how
Bush's "read my lips, no new taxes" and FSLIC's huge debt could coexist," so
mum was the word. By 1989, however, Wall's sleight of hand with the S&Li
numbers had become so outrageous that House Banking Committee Chairman i
Henry Gonzalez called loudly for Wall to be fired. It was hard to argue with

Friends in High Places ■ 297

Gonzalez's reasoning: Anybody who couldn't figure out how bad the problem
was shouldn't be in charge of fixing it.

As for Kd Gray, he was glad his term was over. He knew only too well that
80 to 90 percent of the industry was nowhere near "healthy and thriving." Gray
knew he was still being vilified by almost everyone touched by the scandal.
Federal Reserve Board Chairman Paul Volcker and Treasury Under Secretary
George Gould were two of his few supporters. To the high fliers in Texas and
California, Gray was still the Darth Vader of the Bank Board. To the U.S.
League he was an unpredictable public relations nightmare and a loose cannon
on their deck. To congressmen and senators he was the guy who had caused
them to be reminded that money had strings and their mouths moved when
someone pulled those strings. Almost everyone was glad to hear that Ed Gray
was cleaning out his desk.

Perhaps it was a tragedy that someone of greater national stature had not been
chairman at this critical time, someone like Gray's friend Volcker, who could
have gone to Congress and thrown down the gauntlet. It's difficult to imagine Jim
Wright treating Volcker the way he routinely mistreated Ed Gray. But whatever
Gray lacked in stature, he more than made up for in personal commitment.
When he left Washington he left with bitter memories of a president and admin-
istration that had turned their backs on him when he most needed support. He
also left in debt, while the crooks he had tried to chase out of the industry had
stuffed offshore bank accounts with hundreds of millions of ill-gotten dollars.

The movie The Untouchables opened in Washington the last week before
Gray's departure, and Gray rushed to see it. It was about FBI Agent Elliot Ness's
battles against mobster Al Capone and his bootleggers, and it struck a chord with
Gray. Being under attack from every side for over four years left him feeling like
Ness — one man, alone against the corruption of an entire system. The next day
Gray had scheduled exit interviews with the major newspapers, and he invoked
the name of Elliot Ness, comparing himself to the crime-fighting loner. Only
one newspaper. The American Banker, mentioned Gray's embellishment.

Gray never got to see Congress pass the recap. Two months after he left
office reconciliation between the House and Senate versions was completed and
the bill — which gave the FSLIC $10.8 billion in borrowing authority — was
signed into law in August 1987. Two precious years had been wasted in political
wrangling since Gray had first begun his campaign to get more money for the
FSLIC so that insolvent thrifts could be closed and a permanent stop put to
their hemorrhage of red ink — two years at $10 million dollars a day in additional
losses. (By August 1987 some analysts felt this figure was too low. At the end
of 1988 analysts said the insolvent thrifts were costing the FSLIC $35 million
a day.) But Ed Gray's ordeal was over. Danny Wall had the wheel now, and
his job would be to keep a lid on the problem until the Reagans got out of town
in 1989. Once again political expediency would win out over statesmanship.

CHAPTER TWENTY-FIVE

What Happened?

We set out in 1986 with a simple question: How had thrift deregulation gone
so terribly wrong? To find the answer we decided to take a look at a fev\ dozen
failed savings and loans that we selected virtually at random, attempting only to
obtain a fair geographic sampling. Three years later we had our answer: A
financial mafia of swindlers, mobsters, greedy S&L executives, and con men
capitalized on regulatory weaknesses created by deregulation and thoroughly
fleeced the thrift industry. While it was certainly true that economic factors (like
plummeting oil prices in Texas and surrounding states) contributed to the crisis,
savings and loans would not be in the mess they are today but for rampant fraud. '

Yet to this day diehard apologists for thrift deregulation flatly refuse to admit
that purposeful fraud was, in fact, chiefly to blame for the FSLIC's $200 to $300
billion debt. A few stubbornly adhere to their denials because they still don't
realize what was going on around the countr\-, but most — especially members
of lobbying groups like the U.S. League — are simply trying to cover up their
own culpability. They pushed hard for deregulation and fliey share responsibility
for the results.

Even the part of the industry that did not participate in the orgy of avarice
and fraud must share some degree of blame. They knew what was going on but
they kept their silence, fearing that Congress would re-regulate the industry if
legislators found out what rogue thrifts were up to.

As Edmund Burke said, "The only thing necessary for the triumph of evil
is for good men to do nothing." Fraud became the thrift industry's dirt)' little
family secret.

When Ed Gray tried to clamp down on renegade thrifts, the industry and I
Congress fought his everv' move. Like rebellious teenagers bristling over parental '■
intrusion, thrift lobbyists and many thrift executives complained bitterly that
Gray was cramping their style, that he didn't understand them, that he was old-

298

What Happened? ■ 299

fashioned. Congress, always sensitive to the complaints of large contributors,
listened well. In the end too many politicians became net beneficiaries of the
fraud that swept the thrift industry. WFAA-TV in Dallas reported, for example,
I that in 1987-88 the three largest S&L political action committees gave more
'than $88^,000 to candidates for Congress. As a result, just when the country
needed the best regulators money could buy, those regulators were stopped cold
in their tracks by .some of the best politicians money had bought.

These powerful forces easily outmaneuvered F.d Cray and systematically
undercut his effectiveness. From the very beginning of our investigation we were
told that Gray had bungled the job, that he was "an idiot, a buffoon." People
like lohn Lapaglia, Charles Bazarian, Charlie Knapp, and Tom Caubcrt railed
about Cray and his misguided policies, blaming him for virtually the entire thrift
crisis.

"if your book comes off sympathetic to Cray," Lapaglia warned us, "you'll
be the laughingstock of the industry."

But wc spent many hours interviewing Ed Cray and people who worked
with him during those critical years, and we came away with a different opinion.
It was true that nothing Cray had done in his life had in any way prepared him
for handling a crisis of this magnitude and complexity. He was a public relations
man by trade. Still, even with some of the most powerful forces in government
breathing fire down his back, he didn't fold and he didn't run away. Instead he
took highly unpopular positions that he believed were right and necessary and
he stuck with them. He was one of the first to correctly assess the magnitude of
the problem and react accordingly.

I Ed Cray's biggest fault was that he didn't go public when it became clear
■ that a cabal of political and industry forces were conspiring against his remedial
efforts. He should have blown the whistle on them and blown it loud. He should
have named names. He should have turned the spotlight on what seems to us
to have been sleazy legislative extortion by Jim Wright and others. ' He should
I have held a press conference and exposed the OMB's refusal to give him more
examiners. But Cray believed that common sense would eventually overcome
partisan self-interest. He was wrong.

If those who authored thrift deregulation didn't see the potential for fraud,
others certainly did. The likes of Mario Renda and Mike Rapp and Charles
Bazarian were swinging into action even before the Carn-St Cermain bill was
signed. Renda actually followed the progress of the bill through Congress, making
i notes in his daily desk diary. And when Carn-St Cermain passed, Renda and
the others moved in like Cerman tank divisions in the early days of World War
II, grabbing territory virtually unopposed. Instead of acting to stop the looting.
Congress and regulators debated over whether they should do anything. They

300 • INSIDE JOB

couldn't even seem to decide if the people looting thrifts were crooks or just
misunderstood "entrepreneurs. "

Such a chaotic state of affairs was fertile ground for the mob. And for them
thrift deregulation could not have come at a better time, because the justice and
Labor departments had just cracked down on the mob's pipeline to the Teamsters'
Central States Pension Fund, which had for so long been a ready reservoir of
capital for wise guys who didn't mind paying kickbacks. The 1986 President's
Commission on Organized Crime reported that Jimmy Hoffa, who became
Teamster president in 1957, was indisputably a direct instrument of organized
crime, and his control over the Central States Pension Fund was convenient for
wise guys who couldn't get loans elsewhere. In the mid-1970s, for example, 89
percent of the fund's investments were in real estate loans, mostly to small,
speculative businesses (such a portfolio was highly unusual for such a large fund,
analysts said). "In short," wrote author Steven Brill (The Teamsters), "the mob
had control of one of the nation's major financial institutions and one of the '
very largest private sources of real-estate investment capital in the world."

The president's commission revealed that Hoffa shared his pension-fund
kickbacks with Allen Dorfman, asset manager and consultant to the Central
States Pension Fund, and one of their favorite investments for jsension-fund
money was Las Vegas real estate.- After Hoffa was convicted of jury tampering
in 1964 and went to prison in 1967, Dorfman and members of the mob continued
to control the fund. But at the end of 1982 Dorfman was indicted along with
Mafia and Teamster officials for tr>ing to bribe Ne\ada Senator Howard Cannon
with favors from the Central States Pension Fund, and a month later, January
20, 1983, Dorfman was gunned down in a parking lot.

That same year the U.S. Department of Labor finally forced the fund to
operate according to guidelines enforceable by the courts. That decree resulted
in a dramatic shift in the way the Central States Pension Fund invested its
money. ' The message was clear. Wise guys had to find a new "friendly" lender,
one that offered the same easy, no-questions-asked access to money and the
same liberal nonrepaymcnt terms. Like a gift out of nowhere, deregulated thrifts
became the answer to their prayers. President Reagan had just signed the Gam-
St Germain Act, in October 1982, and the covey of swindlers who had fluttered
around the Teamsters flocked to savings and loans. Simply put, deregulation
was the best thing to happen to the mob since Congress passed Prohibition. It
also provided organized crime with the best money-laundering environment
since the invention of bearer bonds. No one will ever know how many hundreds
of millions, or billions, of dollars the mob and drug organizations pumped
through thrifts during this "anything goes" period.

But we were told repeatedly by regulators, and even Justice Department
officials, that the Mafia, the mob, organized crime, the Syndicate, whatever
label you choose, had not and could not infiltrate the thrift industry in any

What Happened? • 301

serious way. Well, we asked, then why had these people shown up in our
investigations?

Martin Sehwimnier, Mario Renda's "assoeiatc," was, according to Or-
ganized Crime Strike Force investigators, an investment advisor for Frank
"the Wop" Manzo, a reputed member of New York's Luechese crime
family. (The five New York crime families were Luechese, Gambino,
Genovese, Bonanno. and Colombo.)

Mario Renda, who was credited with helping destroy dozens of thrifts
and banks (possibly a hundred or more), was a friend of Sal Piga, whose
rap sheet listed him as an associate of the Tramunti crime family (Car-
mine Tramunti was the boss of the Luechese crime family) and enu-
merated a criminal record of grand larceny, assault and robbery, burglary,
first-degree assault, carrying dangerous weapons, and criminal possession
of stolen property.

Michael Rapp, a.k.a. Hellerman, who looted Flushing Federal Savings
and Loan, among others, said in his autobiography that he had worked
his swindles on Wall Street in the 1970s on behalf of the Luechese and
Gambino families, and a law-enforcement official said the dividing of
the loot from his S&'L swindles in the 1980s was the subject of a sit-
down between the Luechese and Genovese families.

John Napoli, Jr., a Rapp associate who was convicted with Heinrich
Rupp in the Aurora Bank case, was identified in an FDIC lawsuit as
having been associated with "a well-known. Eastern organized crime
family" (identified by a law-enforcement official as the Luechese family).

Lawrence lorizzo told investigators he was a Colombo family lieutenant
and that Renda invited him to join him in his scheme to bust out banks
and thrifts.

lorizzo said in federal depositions that Mario Renda told him that he
(Renda) was handling business for Paul Castellano, a Gambino crime
family boss who was assassinated in 1985.

Murray Kessler, indicted with Richmond Harper (identified by the Dallas
Morning News as a member of the Beebe banking network in the 1970s)
for smuggling arms to Mexico in exchange for heroin (the case ended
in a mistrial), was identified by federal officials as an associate of the
Gambino family.

Beebe's friend and associate, former Louisiana Governor Edwin Ed-
wards, was implicated through federal wiretaps in dealings with New

302 ■ INSIDE JOB

Orleans Mafia boss Carlos Marcello. Marcello in 1979 bragged to an
VB\ undercover agent that lie and two or three other mob bosses "owned
the Teamsters."

A Beebe-controlled bank made loans to Marcello, his son, and several
corporations connected to Marcello, according to the bank's president.

The American Banker revealed that Anthoin Riisso, a former attorney
and a director at Indian Springs State Bank, had represented Kansas
City's Civilla mob family, and bank records showed the Civillas had
.several loans at Indian Springs. For years Nick Civella was the man to
.see about getting favors from the Teamsters, according to the President's
Commission on Organized Crime.

David Gorw'itz, who was with Dick Binder in Santa Rosa (Binder listed
$1.5 million in loans from Centennial on his bankruptcy papers), worked
with Binder in Boston. The Boston Globe reported that the pair were
suspected by law-enforcement officials in Boston of laundering money
for fugitive mobster Salvatore Caruana, a capo in the New England
Patriarca crime family. Gorwitz was also described in court testimony
in the 1970s as a muscleman for the mob.

Lionel Reifler, who indirectly received money from loans made by Judge
Reggie's Acadia Savings, was a career white-collar criminal associated
with Mike Rapp and organized crime figures.

Morris Shenker, who surfaced time and again in our investigation, was
identified in congressional hearings on organized crime as a close as-
.sociate of the Civella crime family. He was Jimmy Hoffa's attorney and
also a close associate of Allen Dorfman, the insurance executive and
sophisticated money manager who had extensive connections to the
Chicago mob (which is reportedly called "the Outfit") and to the Teams-
ters Central States Pension Fund. The President's Commission on Or-
ganized Crime reported that Shenker borrowed millions of dollars from
the fund. Individuals or companies in this book whom we found had
done business with Morris Shenker included Norman B. Jenson, Philip
Schwab, Charlie Bazarian, Kenneth Kidwell, Southmark, John B. An-
derson, Jack Bona, Mario Renda, the Indian Springs State Bank bunch,
Al Yarbrow, FCA, Sun Savings and its president, Dan Dierdorff.

Jimmy "the Weasel" Fratianno in The Last Mafioso told of Jilly Rizzo,
Frank Sinatra's sidekick, associating with him and other mob figures.
Rapp, in his biography, said Rizzo was his close friend. Rizzo was a
borrower with Rapp at Flushing and regulators said he was involved with
Delvecchio at Aurora Bank. Rizzo and Delvecchio sold property in the

What Happened? ■ 303

Poconos that became collateral for a loan at Kdniund Reggie's Acadia
Savings and Loan.

Guy Olano of Alliance Savings and Loan was said by tlic I'^BI to be
connected to people with ties to major Colombian drug families. He
had arranged casino financing through John Lapaglia for Las Vegas
attorney Norm Jen.son, who himself was later identified in evidence
collected by Organized Crime Strike Force investigators as a key figure
in a $300 million drug-money-laundering operation that the Justice
Department said also involved Centennial Savings vice president Sid
Shah.

Philip Schwab failed to get a Nevada gaming license because officials
had more questions for him than he apparently wanted to answer on
the subject of his associations with certain Italian surnamed individuals,
one of whom they described as a convicted heroin trafficker. Consultants
he hired to help him get the license said in their report, "We can only
presume at this point that the Gaming Control Board has information
from law-enforcement authorities associating these individuals with or-
ganized crime activities."

At nearly every thrift we researched for this book we found clear evidence
of either mob. Teamster, or organized crime involvement. Only one conclusion
was possible: The mob had played an important role in the nationwide fraternity
that looted the savings and loan industry following deregulation.

Of course the mob and swindlers didn't suck all the billions out of the thrift
industry, although they certainly got their share. People who had never com-
mitted a crime in their lives fell prey to deregulation's promise of easy money.
Thrift officers watched as the professional swindlers worked their scams and
never got caught and decided, why not? Buttoned-down appraisers, plugging
along in boring jobs making $200 to $600 per appraisal, learned that by simply
raising their opinion of a property's value to match a borrower's needs or desires,
they could raise their own standard of living as well — and the higher their
opinion, the bigger their paycheck. Contractors, attorneys, title company ex-
ecutives, and auditors each found their own ways to get a seat on the gravy train
by perverting their particular business functions for the cause. As Erv Hansen
so correctly observed in 1983, "The beauty of this is that there's going to be
enough money in it for everyone." And there was.

Something else was going on at thrifts too. We avoided dealing with it in
detail because we never seemed to be able to get our arms around it, but it
disturbed us and bears mention. Time and time again during our research we
ran into people at failed thrifts who claimed to have connections with the CIA.
We ran into individuals whom we discovered were dealing secretly with the

304 • INSIDE JOB

Contras. moving large sums of money here, there, and off to nowhere for what
they claimed were co\ert purpK)ses.

At San Marino Savings in Southern California we heard about a major
borrower, G. Wayne Reedcr (who also attempted a couple of failed ventures
with Herman Beebe), meeting in late 1981 at an arms demonstration with Raul
Arana and Eden Pastora, Contra leaders who were considering buying military
equipment from Recdcr's Indian bingo-parlor partner. Dr. John Nichols. Among
the equipment were night-vision goggles manufactured by Litton Industries and
a light machine gun.'' Nichols, according to former Reeder employees and
published accounts, had a plan in the early 1980s to build a munitions plant
on the Cabezon Indian reservation near Palm Springs in partnership with Wack-
enhut, a Florida security firm. The plan fell through. Nichols was a self-described
CIA veteran of assassination attempts against Castro in Cuba and Allende in
Chile. Authorities said he was a business associate of members of the Los Angeles
Mafia. He was later convicted in an abortne murdcr-for-hire scheme and sen-
tenced to prison.

At Indian Springs State Bank we found Farhad Azima, who financed part
of his Global Internationa! Airways operations with loans from Indian Springs
bank. Mario Renda had relationships with Adnan Khashoggi and another deposit
broker who. federal investigators confirmed, was a former CIA operative who
laundered millions of dollars through financial institutions for Baby Doc Du-
valier. the former ruler of Haiti. Investigating Mike Rapp we met Heinrich
Rupp, a self-described CIA contract pilot, and his associate, who claimed the
CIA was using banks to launder drug money and get loans that went to finance
the Contras.

And there was more, much more. Experts had wondered how so many
billions of dollars could just vanish from the thrift industry without a trace. If
some of that money were channeled into the Contra pipeline or used to serve
other legal or illegal covert purposes, that could certainly be one answer. One
respected law-enforcement official told us that a man in prison for bank fraud
had agreed to cooperate with him in an investigation of another bank fraud case,
in exchange for a good word to the judge, until he was suddenly granted a White
House pardon. The official said he was told the pardon was obtained through
CIA chief Bill Casey. And as we were going to press we were working with a
fellow reporter digging up information that Southmark may have had a rela-
tionship with some members of the covert Iran-Contra crowd.

We don't know what all that means. We didn't have time to investigate both
that story and this one, but we want to be on the record as saying that we finally
came to believe something involving the CIA and Contras was going on at thrifb
during the 1980s. After all, deregulation created enough chaos to accommodate
just about anyone's purposes. And taking out loans from federally insured in-
stitutions, giving the money to the Contras, and letting federal insurance pick

What Happened? ■ 305

up tlie losses does have the flavor of what Ollie North might think was a "neat
idea."

The S&'L industry-inspired "see no evil" approach to tlie looting at thrifts
helped keep the mounting crisis out of the puhlic consciousness until 1988. It

; surfaced then only because nonindustry analysts began to insist loudly that the
FSLIC's losses were approaching $100 billion. Suddenly the American public

I started paying attention. For two years the three of us had worked in near

, isolation. With the exception of a handful of other reporters around the country,
we couldn't find anyone who understood what was happening or seemed to care.
But suddenly e\cryone wanted to talk to us about the problem. We were just
winding up our investigation when the General Accounting Office in Wash-

' ington sent two investigators out to Guerneville. The two buttoned-down bu-
reaucrats wanted to know if any "La Cosa Nostra types," as they so quaintly put
it, had infiltrated the thrift industry after deregulation. A producer for CBS's 60

' Minutes contacted the House Committee on Government Operations to get
background for a 60 Minutes segment on the thrift crisis, and an attorney for
the committee referred him to us. He, too, made the trek to Guerneville to

' spend a few days going through our files.

The FBI announced that fraud and embezzlement cases settled at financial

■ institutions were up 42 percent in 1987 and more than doubled (to $2. 1 billion)
in 1988. In October 1988, Congress finally caught up and announced their
findings that the country's financial institutions were targets for bust-outs by
organized crime syndicates and generic swindlers. A House committee reported,
"At least one-third (and probably more) of commercial bank failures and over

' three-quarters of all S&L insolvencies appear to be linked in varying degrees to
[serious misconduct by senior insiders or outsiders]."'

In 1988 the comptroller of the currency surveyed recent bank failures and
found that less than 10 percent were caused solely by economic factors. The
FSLIC began issuing profiles of the failed thrifts it was trying to dispose of (sell,
merge, give away), and the profiles almost always included tales of looting and

'insider abuse.*

' Finally even FHLBB Chairman Danny Wall, who had made a profession
out of denying that there was a problem, admitted to the House Banking Com-
mittee's Subcommittee on Financial Institutions in March 1989 that the FHLBB

'was finding more and more instances of fraud and mismanagement: "In virtually

■all cases, the boards of directors of resolved [handled by the FHLBB in 1988]
institutions were found to not have acted prudently."

But after all was said and done, what would come of it? Had anything been
learned? Probably not. As far back as 1976 key members of Congress knew what
might happen if they deregulated thrifts. That year Congressman Fernand St

306 • INSIDE )OB

Germain (D-R.I.) had chaired the House hanking subcommittee investigating
the failure of Citizens State Bank in Carrizo Springs. Texas, and the network
of businessmen (including Merman Beebe) whom authorities believed were abus-
ing dozens of financial institutions in the area. As we read the hearing transcripts
1 1 years later, it was clear that Congress and federal regulators knew in 1976
what kind of people were out there just waiting for an opportiinit>- to victimize
financial institutions if given the slightest op)ening.

During those 1976 hearings St Germain said about bank failures:

We have been repeatedly told that most major bank failures have been caused
by criminal conduct. . . . hisider loans have been the principal cause of
bank failures over the past 1 5 years. . . .

Yet, he noted:

Of the 56 banks that failed in the United States between 1959 and 1971.
34 had passed their most recent examination in a "no-problem" cafegon',
and 17 of the 34 had been given an "excellent" rating. Undeniably, this
fact alone points to an increasingly apparent deficiency in the existing ex-
amination process.

... All too frequently examiners do not "look behind the loan" as to the
adequacy of collateral and do not inquire into relationships behveen insti-
tutions due to agency coordination difficulhes. . . .

There has been a growing feeling in recent years of the need for greater
uniformity in statutes and regulations relating to self-dealing loans, conflict
of interest, duties and responsibilities of boards of directors, and loan lim-
itations for directors and stockholders.

With those words St Germain had summed up not only the situation in the
banking industry in 1976 but also predicted with stunning accuracy the fate of
hundreds of S&Ls less than ten years later.

Federal regulators who testified at the Citizens State Bank hearings (among
those testifying, by the way, was Rosemary Stewart, the regulator whose picture
would be a target in Tom Gaubert's mini-shooting gallery ten years later) warned
that their ability to keep swindlers out of the banking industry was severely
hampered by privacy laws that made it illegal to keep lists of undesirables who
had a history of abusing financial institutions. Furthermore, anyone who wanted
to buy a bank could. Only officers and directors, not owners, were required to
meet certain minimum standards.

Committee member Representative Henr\' B. Gonzalez (D-Tx.) also sat on
the subcommittee investigating Citizens State Bank and he made the most ironic
comment of the hearings:

What Happened? ■ 307

Here, however, we have found the one bright spot: namely, tliat the Federal
Home Loan Bank Board is aware of the situation and is plainly working
hard to turn it around. Even here we probably must consider strengthening
enforcement powers of the Federal Home Bank Board. . . .

Remember, this was 1976.

But then Representative Gonzalez gave this wise and eloquent summation:

Charters issued to financial institutions are given for public reasons. Banks
are supposed to serve the public. They have a public character. It is the
public that suffers when bank owners and officers buy and sell banks like
used cars, when they engage in self-dealing, when they plunder and steal.
We have seen the pattern of flagrant and squalid misconduct in these in-
stitutions. There is no reason to doubt that other institutions are being
stripped and raided this very day.

We have found regulation that is forgetful, benign, and on some levels
pitiful, hiadequate regulation is what has made possible the kind of outlan-
dish sordid conduct we have discovered. We have lifted only a corner of the
rock. What we have seen is enough to disgust anyone.

Corrective action is needed both at the state and federal level. Administrative
regulation can be — and must be — strengthened. State statutes need to be
strengthened. Federal statutes probably need updating, and yet at the bottom
this is the ultimate truth: no law is going to replace efficient, honest and
aggressive regulation.

Six years later Congress, led by St Germain, voted to deregulate the savings
and loan industry with the Garn-St Germain Act in 1982. (Gonzalez voted
against both the 1980 and 1982 deregulation legislation.) Had St Germain for-
gotten everything he saw and learned at Citizens State Bank?^ It would appear
so. During the time his deregulation bill was pending in 1981 and 1982, St
Germain was dining around Washington on the U.S. League of Savings Insti-
tutions' charge accounts.' That little indiscretion earned him a special Justice
Department probe into his cozy relationship with the U.S. League and the
$10,000 to $20,000 a year in entertainment they reportedly spent on him but
he never reported. Though the Justice Department decided not to prosecute St
Germain, it found "substantial evidence of serious and sustained misconduct."
A House ethics committee investigation in 1986 alleged that he understated his
assets by more than $1 million for several years and took at least seven trips on
Florida Federal Savings' jet (St Germain reportedly had a close relationship with
the CEO of Florida Federal Savings in St. Petersburg), but they recommended
no punishment. St Germain's home-district voters voted him out of office in
the 1988 election, and he thus became the first major Washington politician to

308 • INSIDE JOB

succumb to the thriftgate scandal. Because any legislation to clean up the savings
and loan industrv- would have to go through the House Banking, Finance and
Urban Affairs Committee, which St Germain had chaired, we hoped his ouster
was a good omen. He was replaced by Representative Henry B. Gonzalez, who
had spoken so eloquently during the Citizens State Bank hearings in Texas 12
years earlier and later voted against deregulation.

St Germain wasn't the only person who demonstrated a flat learning cune
when it came to the thrift industry.

in 1988 Wall remembered his benefactor, Senator Jake Garn, by com-
mitting the bankrupt FSLIC to donating $6,000 to the Jake Garn Institute
at the University of Utah. When a reporter asked Wall about the do-
nation, she reported that he replied, "So?"

In the fall of 1988 members of the U.S. League— who as late as the
summer of 1987 argued, against all reason, that the FSLIC needed only
$5 billion to get back on its feet — held their annual convention in sunny
Honolulu. Network television ran colorful footage on the evening news
of thrift executives partying on the sandy beaches, showing no apparent
concern for the billions in losses their industry had incurred, losses they
had every intention of asking the taxpayer to cover.

Only a few weeks earlier three officials of the Federal Home Loan Bank
of San Francisco flew at bank expense to Italy and Spain to choose
granite samples for the bank's new 20-story headquarters buildmg. (After
a public outcry they decided to use American sandstone from a quarr>'
in Pennsylvania.)

In 1987 an annual survey of executive salaries and benefits showed that
for the second time in three years thrift chief executive officers got much
larger increases than CEOs in other industries. In 1987 total compen-
sation for thrift CEOs increased 13 percent, 5 percent more than for
CEOs in other industries and nearly triple the 4.4 percent rise in the
consumer price index.**

Taken altogether, it was enough to make a taxpayer scream, since by the
end of 1988 it was being widely reported that taxpayers would probably have to
fund most of a $200 to $300 billion FSLIC bill, an amount equal to the entire
NASA budget for the next 20 to 30 years. The potential cost to the average
American taxpayer was estimated to be at least $2,000 each (or $200 a year on
every person's 1040 for ten years) assuming the hole wasn't deeper than estimated,
and that was not a very safe assumption. By the end of 1988 insolvent thrifts
yet to be closed were costing the F'SLIC $35 to $40 million a day in additional
red ink, or at least $12.7 billion a vear.

What Happened? ■ 309

111 March 1989 President Bush's point man on the thrift crisis, Richard
Breedcn, warned thrift industry leaders meeting behind closed doors in Los
Angeles that the new administration's broom was about to sweep the industry
clean and not to get underfoot.

"This is a very delicate and very dangerous situation," Breeden said. He
warned that the administration was in no mood for trouble from either thrifts
or their lobby groups. "I'm here today to tell you that it would not be in the
long-term best interests of this industry to oppose our plan. We don't have ten
months this time to sit around and debate this thing. This is a very dangerous
situation."

CHAPTER TWENTY-SIX

Taking the Cure

The American savings and loan industry' has been damaged beyond repair. Little i
can be done now to mitigate the damage done by careless and thoughtless
deregulation. Over the next five or ten years the savings and loan industry as
we know it today will quietly disappear into history, one of the last relics of post-
Depression New Dealism. The FHLBB, FSLIC, etc., may gradually be merged ,
with the bank regulatory agencies, and the few remaining distinctions between ,
thrifts and banks will \anish, or the thrift regulatory apparatus will remain to
supervise financial institutions still called S&Ls but very unlike today's thrifts.
Perhaps we will be left with community banks — to handle mortgages, consumer
loans, and small business loans — and commercial banks. In any case, the countr)'
will have institutions offering home mortgages and a safe haven for deposits, but
they will bear little resemblance to traditional savings and loans. As deregulation
progresses, more and more Americans may have to turn to unregulated mortgage
bankers' for home loans because banks and thrifts lulled by the siren song of
developers will ha\e little interest in mortgages.

While the thrift industry plays out its last hand, the American taxpayers
must concern themselves with how the industry's little $200 to $300 billion
problem can be solved. There has been and will continue to be a great deal of
effort expended in Washington to disguise the politically dangerous fact that
American taxpayers are the only people with deep enough pockets to pay the
bill. The remaining members of the thrift industry can't pay it.- Already, thrifts
are paying premiums two times higher than banks are paying and that extra
expense makes it very difficult for them to compete in the financial marketplace.
Forcing them to pay even more would only create more casualties. We believe
it would be inherently unfair to expect the prudently managed thrifts to pay the
entire cost of this debacle (even though their silent acquiescence allowed the
situation to get so far out of hand) because the primary responsibilit> for the

310

Taking the Cure "311

huge losses belongs to those who plundered and to politicians who were seduced
by the thrift lobby and campaign contributions.

But as with any such sticky issue, officials in Washington were looking
for a way to fix the problem without personally taking any heat. A wide-open
debate over the thrift crisis was the last thing Congress, the Federal Home
Loan Bank Board, or the thrift industry lobby wanted. Too much dirty laundry
would get aired in the process. To avoid just that the same people who brought
us this $200 to $300 billion problem began cooking up schemes for quietly
dealing with it.

To get a jump on any new Bush administration (nonindustry) initiative, and
because Congress wouldn't give them the money to close the institutions down,
the FHLBB initiated a crash program to "sell" 220 of the sickest institutions
before changes in the tax laws at the end of 1988 made such acquisitions less
attractive. But to attract buyers the Bank Board had to offer huge financial and
regulator*' incentives.' Analysts"" said that selling the institutions in this manner
actually cost up to 40 percent more than simply closing them immediately,
paying off insured depositors, and selling the institutions' assets. When the
FHLBB sold American Savings and Loan (a subsidiary of Charlie Knapp's FCA)
in 1988 to the Robert Bass Group, the buyer put $350 million cash into the
deal, with a promise of $150 million more within three years. The FSLIC
subsidized the balance of the transaction with nearly $2 billion of its own money.
In another "take my wife, please" deal, the FSLIC sold failed Eureka Savings
to former Bank of America executive Steve McLin's group, America First. As
part of the deal the FSLIC agreed to pay for all future losses from bad loans on
Eureka's books and contributed $291 million in cash to make Eureka solvent
for the new owners. The FSLIC agreed to share the tax-loss benefits with America
First on a 50-50 basis, just to sweeten the deal, and guaranteed America First
a built-in profit on troubled assets that came along with the thrift. One source
close to the FSLIC/McLin negotiations described dealing with the FSLIC ne-
gotiators as "taking candy from a baby," and in the first seven months of own-
ership America First reported a $10 million profit from its Eureka Federal
operations. ^

For the first time, The Wall Street Journal reported, thrifts are being run by
corporate raiders, with assets guaranteed by the government.

These arrangements were attractive to the FHLBB and some politicians
because many of the costs were in the form of tax breaks'* and interest payments'
that can be spread out over many years and may go quietly unnoticed. But the
losers will be the U.S. taxpayers, who several years from now may have to pay
an even larger thrift bill than is due today if these same (but even sicker) S&Ls
wind up back in the taxpayers' laps. It is especially troubling that some of the
buyers of these insolvent thrifts are other thrifts who are themselves almost
insolvent or developers with no banking experience but a lot of uses for

312 • INSIDE JOB

money — those ubiquitous "entrepreneurs." These deals are simply a new batch
of ticking time bombs.

Representative Jim Leach (R-lowa) said the deals were too good for the
buyers but not good enough for the government. What has developed, he said,
is a giveaway system where the potential profit has been privatized while the
potential loss has been socialized — exactly the problem that brought us the thrift
crisis in the first place.

In 1988 regulators put together what they called the "Southwest Plan," in
which they created 1 5 large thrifts out of 87 smaller, insolvent ones and threw
in some federal "assistance." The very first Southwest Plan deal in Texas merged
four sick thrifts into one large thrift. Southwest Savings Association of Dallas,
owned by Caroline Hunt, the daughter of one of the Texas Hunt brothers." The
FSLIC forgave Hunt a debt estimated at $15 billion and contributed $2 billion
to the new megathrift. Within ten months Southwest Savings was reportedly
seeking an additional $200 million in federal assistance. In March 1989 the
comptroller general of the General Accounting Office was saying that the South-
west Plan had little chance of succeeding. He told the House Banking Committee
that the FHLBB didn't even audit the 87 Texas thrifts involved in the Southwest
Plan before arranging their mergers.

Other mergers and purchases the FHLBB had arranged were already falling
apart. Ramona Savings in Fillmore, California (its president, remember, was
arrested at the San Francisco passport office as he tried to flee the country for
the Grand Cayman Islands), was sold to Midwest Federal in February 1988.
Within a year Midwest Federal had also failed and news reports alleged fraud
and misconduct by the Midwest chairman, who was reportedly under FBI in-
vestigation.

In March 1989 the GAO told the Senate Banking Committee that the FSLIC
was so disorganized and its record-keeping so sloppy that it was impossible to
tell how much the deals would eventually cost the federal government and
whether or not some White Knights got preferential treatment.

In February 1989 the new Bush administration moved swiftly to take the
initiative away from the FHLBB and presented a complex plan that was still
being revised as this book went to press. The most immediate aspects of the Bush
plan called for the FHLBB to be placed under the direct supervision of the Trea-
sury Department and the watchful eye of the comptroller of the currency. The
FSLIC's job of seizing and liquidating the nation's junkyard of insolvent thrifts
would be handed over to the FDIC. The complex plan also called for $50 million
for the Department of Justice's white-collar crime and fraud divisions.

The Bush plan was a clear improvement over the status quo, but the idea of
the FDIC shouldering the additional burdens of the thrift industry' gave little com-

Taking the Cure '313

fort. The same people who decided it was a good idea to lend bilHons of dollars to
Argentina, Mexico, and Brazil would be deciding what was best for thrifts.

The FDIC said its assets at the end of 1988 stood at around $18 billion —
not a lot of money for an agency with plenty of problems of its own. In 1987 a
record 184 banks failed, costing the FDIC more than $3 billion, and 221 were
closed in 1988 at a cost of $3 billion to $9 billion. FDIC examiners said there
were an unprecedented (since the Depression) 1,500 problem banks around the
country at the end of 1988 — three times the number of problem thrifts that
remained to be dealt with. In late 1988 a banking industry watch group, the
Shadow P'inancial Regulatory Committee, reported that the FDIC was itself
nearly insolvent but wouldn't admit it. The shadow group said the FDIC had
only $400 million left.

The FDIC record in dealing with those troubled banks was not much better
than the FSLIC's in many cases and, like thrift regulators, the FDIC was pol-
iticized. Jake Butcher, who with his brother was close to the Carter administration
and looted 23 banks in Tennessee and Kentucky until they collapsed in 1983
(even though the insider dealing was identified as early as 1977), bragged to a
journalist that he had helped name a member of the FDIC board. (The Butcher
brothers are serving 20-year prison sentences for bank fraud.)

But the Bush administration proceeded with its plan to put the FDIC in
charge of closing more than 200 insolvent thrifts, and even before Congress
began to debate the Bush plan the FDIC moved in. Closing those brain-dead
institutions resolved two immediate problems: first, it stopped the losses that
such a thrift racked up each day it remained open — an open, insolvent thrift is
like an open artery; and second, each closure removed another piece of the
excess capacity created in the thrift industry when everyone rushed to open his
own money machine after deregulation. But it mired the FDIC in a problem
the FSLIC had been wrestling with for some time — how to operate and then
dispose of the assets of the seized thrifts. Regulators did not make good real estate
managers or brokers, and the stories of their inefficiency and wasted millions of
dollars came to us by the dozens.

Acknowledging the magnitude of the problem, FDIC Chairman Bill Seid-
man said, "The amount of real estate that will be up for sale is likely to exceed
$100 billion, so it is a huge task, the biggest liquidation in the history of the
world."

Immediately reports began to surface that with the FDIC turning its attention
to thrifts, banks were going dangerously unsupervised. The House Committee
on Government Operations had reported in October 1988 that the FDIC ex-

314 • INSIDE JOB

amination staff was understaffed then and "failed badly" at meeting its exami-
nation schedule. In 1986 and 1987, 79 out of 189 state banks that failed had
not been examined within a year of their failure, 39 had not been examined
within 18 months, and 29 had not been examined within three years prior to
their failure. The American Banker reported in March 1989 that hundreds of
state-chartered banks in Texas were operating essential!) unsupervised, just as
bank failures in the state had soared from 22 in 1987 to 44 in 1988 to a projected
50 in 1989.

Clearly, the only way to successfully tackle the thrift crisis was with a co-
ordinated, overall attack approved by the Bush administration and Congress.
Piecemeal efforts had proved inadequate time and time again, and siccing the
FDIC on thrifts without adequately increasing its staff was just one more example.
President Bush entreatied Congress to act on his proposal in 45 days, but there
was no chance whatsoever that they would. And the $35 to $40 million-a-day
losses continued.

While Congress tried to deal with the Bush plan, the savings and loan industry
continued to operate under regulations (especially on the state level) that hadn't
changed much since the heady days of deregulation. It was true that some
important improvements had been made. For example, w hen California Savings
and Loan Commissioner William Crawford succeeded Larry Taggart in early
1985, he stopped the expansion of the state thrift industr\' dead in its tracks until
he could get the out-of-control situation in hand. From 1981 through 1984,
California regulators had approved 172 thrift charters. From 1985 through 1988,
Crawford approved one.

Federal and state regulatory agencies were in general beefing up their staffs
with more regulators and examiners. And some important re-regulation had
occurred on the federal level, including: standards were raised for thrifts seeking
FSLIC insurance; in 1985 Gray placed limits on growth, raised minimum net-
worth requirements, and limited direct investments; in 1986 he increased reserve
requirements; and the FHLBB began demanding more accurate appraisals. In
addition, savings and loans had to start carrying assets on their books at values
that more closely reflected actual market values. While the new standards
came with qualifications that blunted some of their effectiveness, and the .
philosophy of forbearance continued, these were important steps in the right i
direction. But regulators and Congress still needed to develop a comprehensive
program to ensure that savings and loans (and banks) would stop acting like
drunken sailors.

Banks and thrifts should be held to the same standards when they are serving i
the same market, and the following points must be addressed in any future i
legislation:

Taking the Cure '315

Politics:

The issue of politics as played in the halls of Congress hardly needs further
mention here except to report the ironic results of the ethics probe of Speaker
Jim Wright. The outside counsel to the House Ethics Committee, Richard
Phelan, submitted his report F'ebruary 21, 1989, and concluded that in savings
and loan matters Wright broke House rules four times:

When he removed the recap bill from House consideration in order to
pressure the Bank Board to change its resolution of the Craig Hall matter.

When he sought a change in the Bank Board's decision to oust Tom
Gaubert from Independent American Savings.

When he attempted to "destroy [joe] Selby's career" based upon the
accusation that he was a homosexual.

When he tried in early 1988 to get Danny Wall to fire William Black
(by then Black was working for the FHLB in San Francisco and was not
within Wall's jurisdiction).

But the House Ethics Committee ignored Phelan on the S&L matters.
Members concluded that Wright violated House rules 69 times, but not when
he tried to get a little service for his thrift constituents.

Still, the savings and loan issue wouldn't die. In May 1989 during the Dallas
trial of some Commodore Savings Association officials (for allegedly illegally
firnneling corporate money into a political action committee headed, coinci-
dentally, by Wright's friend Tom Gaubert), defendant John Harwell, a former
Commodore vice president, said Wright solicited campaign contributions for
Democrat Jim Chapman during a meeting of S&L executives in Dallas and also
said Wright understood the problems that pending direct-investment legislation
could create for thrifts. Subsequently, the PAG received large donations, some
of which went to Chapman, according to press reports, and the legislation never
made it to the House floor. Wright denied any connection, saying, "You can
look until you're blind, ask until you're hoarse, listen until you're deaf and you
will never find anybody of whom I've asked anything in return."
I If the FHLBB remains in operation, several changes need to be made to
help keep political pressure from playing such a strong role in the regulation
process. The Bush plan called for the elimination of the three-member Bank
Board, but if it is retained, the three members should be appointed for si.x-year
terms rather than the current four-year terms. The requirement that no more
than two members can belong to the same party should be eliminated — the
White House should select the best-qualified people regardless of their political

316 • INSIDE JOB

I

affiliation. The FHLBB should not oversee the FSLIC— the FSLIC should be
a separate entit\', free fi'om any political pressure the FHLBB might exert.

Though transferring examiners to the district banks served an important
purpose when Gray couldn't get Stockman's approval for more examiners, it
created a possible conflict of interest when a president of a troubled S&L was
sitting on the board of the supervising district bank (FHLB directors are elected
by the member S&Ls). Charles Keating raised the further objection that his.
company's thrift, Lincoln Savings, was being regulated by officials (the San
Francisco FHLB board, which was made up of savings and loan executives in
his district) who were in competition with him. But even under the old system
the potential for conflict of interest existed. For example, when examiners from
the FHLBB were examining Empire Savings' books in 1982, Empire Chairman
Spencer Blain was an official of the FHLB of Little Rock, which was responsible
for any disciplinary measures that might grow out of the examination.

The Topkea Federal Home Loan Bank, under its president, Kermit Mow-r
bray, became embroiled in several political controversies, and an official said
Mowbray was sharply criticized by Ed Gray for not being tough enough in his
sujjervision. For example, regulators said, the Topeka bank had been receiving
warnings since 1985 that Silverado Savings of Denver was on a collision course
with disaster, and Silverado borrowed heavily from the Topeka FHLB, but no
significant supervisory action was taken against the $1 billion thrift until it was
finally declared insolvent in December 1988. (The thrift fell within the juris-
diction of the Topeka FHLB.) A former analyst for the Topeka FHLB, James
Moroney, went public with his conviction that politics was the reason. Moroney
declined to elaborate, but published reports said Larn- Mizel, a Republican
activist who had raised over $1 million for the Republican party, was a borrower
at Silverado; Neil Bush, son of then-Vice President Bush, sat on SiKerado's I
board of directors;** and Silverado's chairman, Michael Wise, was reported by I
the Denver Post to be a favorite of the thrift lobbying organization, the U.S.
League.

"The problem in my assessment," said Moroney, "was the lack of separation
between the examination and supervision function at the I'opeka bank."'"

Deposit insurance:

There is a place for the entrepreneurial bank or thrift in today's marketplace,
but the risks such a nontraditional institution takes should not be underwritten
by federally backed deposit insurance. Until the politically powerful in the thrift,
industry are willing to let go of the FSLIC security blanket in return for the
right to wheel and deal, all their talk about free enterprise is simply hypocrisy.
Deposit insurance was established so the common person could be assured that

Taking the Cure '317

his relatively meager life savings could be invested safely. It's time to get back
to that concept.

Deposit brokers:

Deposit brokers' access to thrifts was limited in the 1960s precisely for the reasons
Gray wished to limit them again in 1984: Their ability to scour the countryside
for the highest rate in the nation creates an atmosphere that pushes rates up, as
institutions compete for the easy-to-get institutional deposits, and encourages
thrifts to use the expensive deposits in high-risk ventures. Insured brokered
deposits also are too easy a source of fuel for fraudulent deals.

We believe, however, that the problem is not necessarily the brokers them-
selves but, again, the insurance coverage. Deposit brokers can perform a legit-
imate and important function by efficiently moving money around the country,
but we should limit FSLIC insurance coverage to $100,000 per deposit broker,
per institution. Even Mario Renda would have had difficulty getting normally
honest thrift officials to sell their integrity for a $100,000 deposit.

Capital requirements:

Before deregulation, thrifts were supposed to have 5 percent of their total assets
in tangible reserves to cover unexpected losses. But regulators dropped the re-
quirement to 3 percent in 1981 as fewer and fewer institutions were able to meet
the 5 percent standard. The 3 percent rule, coupled with a regulation adopted
in 1972 that allowed thrifts to meet the reserve requirement by averaging reserves
over a five-year period, allowed thrifts to grow much too fast, if they were so
inclined, and the crooked ones were. This high leveraging capability was one
of the chief elements that attracted "entrepreneurial" owners into the industry.
TTie brake on lending that the reserve requirement achieved disappeared.

A high capital requirement is a key element to a healthy banking or thrift
industry, and we applaud a movement within the industry to support an 8 percent
reserve requirement that would increase as a thrift's investment risks increase.
The FHLBB attempted a decade ago to develop a risk-based reserve requirement
but abandoned the plan in 1980 when the thrift industry objected. If the FHLBB
had stuck to its guns, much of the artificial growth that followed would not have
been possible.

Regulatory agencies:

Deregulation of the financial services sector has blurred the distinctions be-
tween financial institutions. Mortgage brokers and commercial banks, as well

318 • INSIDE JOB

as thrifts, now provide traditional home-loan mortgage services. As a result
many people feel a separate thrift industry is no longer needed." But if thrifts
do continue to exist as a separate entity, they must be prepared to fund an
adequate regulatory stafi' and be able to offer auditors and examiners salaries
equal to what they could earn at private auditing firms — only then can they
expect to attract quality staff. If thrifts are at all reluctant to pay the bill
for such a regulatory structure. Congress could take this opportunity, this
crisis atmosphere, to swiftly put the industry out of its misery. They could
liquidate the twelve district banks and apply to the FSLlC's deficit the estimated
$13 billion in equity that the district banks hold, fill the rest of the FSLIC
hole with a federal bailout, and liquidate the FSLIC. Close all the sick thrifts
immediately and send the healthy ones out for applications to become banks.

Accounting principles:

Accounting practices used by thrifts (Generally Accepted Accounting Prin-
ciples and Regulatory Accounting Principles) were practically impenetrable
except by specially trained accountants. They looked like something authored
by Lewis Carroll. In dozens of ways thrifts could legally doctor their balance
sheets, and they used those smoke-and-mirror accounting methods — usually
with the regulators' blessing — to hide the sorry truth of their deteriorating
condition from the public and, to some extent, from themselves. Thrifts
should be required to adhere to accounting methods that reflect reality,
no matter how distasteful that reality may be. They should be required
to regularly revalue their assets to current market conditions ("mark to
market").

Screen the thrifts' ofiicers, directors, and owners:

Set up a process modeled after the New Jersey and Nevada Gaming Control
Boards, which screen and thoroughly investigate applicants for gambling licen-ses.
Look into applicants' pasts, their records in other jurisdictions, and their asso-
ciates. Determine the source of the funds that applicants are using to capitalize
their new institution. (Herman Beebe grubstaked more than one unethical
banker.) And after they are approved for a charter, recall thrift owners for a
thorough reevaluation at the slightest breath of scandal. If it's determined that
they hang around with crooks, show them the door. Don't let con men be
bankers. Don't let borrowers be lenders. Remember the words of California's
tough Savings and Loan Commissioner Bill Crawford: "The best way to rob a
bank is to own one." And the words of Willie Sutton when he was asked why
he robbed banks: "Because that's where the money is. "

Taking the Cure • 319

Rewrite bank secrecy laws:

It's high time to bury the Depression-era fear of runs on hanks. I'hat phobia is
one of the underlying justifications for the secrecy that surrounds Bank Board
actions, but, in fact, the best thing that could have happened to the thrifts in
this book would have been an early run on deposits to force more timely action
bv regulators. Secrecy was the single most important factor in allowing losses at
thrifts to get so large. It played directly into the hands of anyone who had
something to hide. It even prevented ethical S&L managers from monitoring
their own industry, because when they reported their concern about a high flier
to regulators, they never heard another word about the case.

The secrecy was inevitably carried to ridiculous extremes, as when regulators
sent us several short biographies ("bios") of themselves, prepared for the media
. . . and each one was stamped "confidential. "

We recommend opening thrifts and banks to the light of day, and if depositors
don't like what they see and decide to take their money elsewhere, so be it.
Examination reports, for example, should immediately be made public. If Ver-
■ non Savings' depositors had discovered the kinds of screwball deals that thrift
was involved in when its assets were only, say, $300 million, and there 'd been
an ugly little run on deposits, forcing regulators to pay attention, think how
much the FSLIC would have saved. Instead, secrecy let Vernon swell to over
$1 billion in assets before it finally collapsed — all in the name of "privacy."

Law enforcement:

The nation's legal systems weren't prepared for the upheaval that followed de-
regulation. Prosecuting financial fraud cases became a nightmare, partly because
it was a fairly simple matter to bust out a thrift or bank without clearly breaking
a single law; Borrow (or have your associate borrow) lots of money, never pay

i it back, blame a bad local real estate market or (if the scam was in the South-
west) the falling price of a barrel of oil, and enjoy the proceeds tax-free since
debt is not taxed. Prosecutors had a tough time proving intent to defraud.

I "Let me wave a pair of bloody underwear in front of a jury in a murder trial
and I can have their undivided attention," complained one U.S. attorney. "But

I let me wave a handful of phony deeds and loan applications in front of that

I same jury and their eyes just glaze over."

Congress should pass legislation that expands and redefines bank fraud and
establishes new and more severe penalties, particularly for those who have a

j history of abuses at institutions. There are too many cracks in the law through
which highly sophisticated criminals can slip.

White-collar crime is a growth industry and the Justice Department's small
fraud task forces are not an adequate weapon against it. Nor are individual FBI

320 • INSIDE JOB

agents chasing swindlers around their own blocks. Just as the Justice Department
created permanent regional organized crime strike forces around the countr)',
they now need to establish similar white-collar crime strike forces. Such strike
forces could keep track of these highly mobile swindlers as they move from
jurisdiction to jurisdiction, state to state. And, as the strike forces did with the
mob, they could penetrate the nehvork of associations that white-collar criminals
use to facilitate their schemes. ITiey could establish long-term sting operations
and place in the field undercover agents who would act as an early warning
system when a scam was about to go down. Only then would prosecutors have
an effechve weapon against the growing number of economic terrorists bleeding
today's financial services industry.

Not only is no such white-collar crime strike force being considered but,
remarkably, one of the first suggestions made by Attorney General Richard
Thornburgh upon taking office in 1989 was that the 24 regional organized crime
strike forces be eliminated. We found incontrovertible evidence of organized
crime involvement in the thrift crisis, but Thornburgh wanted the strike forces
disbanded and merged with the I'.S. attorness, who have so often proven them-
selves ineffective in battling bank and thrift fraud. The battle was a bureaucratic
one, with Thornburgh supporting the U.S. attorneys, who didn't like having
independent strike forces operating in their jurisdiction. But we remembered the
trouble Mike Manning had finding a U.S. attorney who would take the Mario
Renda case, and we strongly agreed with assistant U.S. Attorney Bruce Maffeo,
who prosecuted Renda in Brooklyn, when he said, "The First United Fund case
provides a vivid example of why the organized crime program is necessar)' to
effectively investigate and prosecute complicated financial crimes. Without the
institutional dedication of resources and time that the organized crime sechon
uniquely affords, this case and others like if would nc\er have been solved."
The strike forces should not only be retained, but they should be expanded to
include non-mob white-collar crime. Another change in the works, moving
white-collar crime out of the jurisdiction of ci\il racketeering laws (RICO), is
another bad idea. Securities, accounting, commodities, and other industries are
lobbying against the Racketeer Influenced and Corrupt Organization Law, but
it is a powerful tool against economic, white-collar crime. As Thornburgh said,
it is one of the few federal laws designed "to attack the business of crime."

The Bush plan did call for a token increase of $50 million in the Justice
Department's white-collar crime budget, but it would be a mere drop in the
bucket. When we considered that just one of our alleged thrift abusers, Tom
Nevis, got over $80 million in loans from a single failed thrift, according to the
FBI, $50 million seemed insignificant — and so would be its effect.

Federal judges need to be schooled on the damage that white-collar criminals
do. Too many major white-collar swindlers, like Herman Beebe, get meaningless
short sentences. Judges need to get away from the notion that a person who robs

Taking the Cure '321

a bank with a gun and one who defrauds it with a pen are someiiow different.
They are not. Only their techniques differ. Kither way, the money has been
stolen. In fact, bank robbers usually run out the door with only several thousand
dollars, while the average swindle nets hundreds of thousands, or millions, of
dollars. White-collar criminals should be sentenced to hard time at regular
mainline federal prisons, not minimum-security "country clubs." Anything less
fails to establish a creditable deterrent to bank fraud. A new sentencing law
should include a clause for bank fraud that reads: "Use a Pen, Go to Jail."

Fortunately, new federal sentencing guidelines that went into effect Novem-
ber 1987 prescribe minimum prison terms based partly on the amount of money
stolen, regardless of whether the theft was robbery or fraud. Unfortunately, the
law went into effect too late to apply to many of the S&L looters. Meanwhile,
the five-year statute of limitations is running out on many of their crimes, and
they are laughing up their silk sleeves.

FSLIC legal action:

The FSLIC typically files civil lawsuits against officers and directors of institutions
they believe have been "mismanaged." If the officers and directors of a failed
thrift have assets, the FSLIC should take them. If they don't, the FSLIC should
go after the officers' and directors' insurance coverage. Too often we saw the
FSLIC spend millions of dollars to get a civil judgment against a crooked former
thrift officer, only to agree later to a settlement that was a farce.

In 1988 regulators settled secretly with Frank Domingues and Jack Bona,
whom they had sued in connection with $200 million in loans that contributed
to the failure of San Marino Savings and Loan, San Marino, California.'' When
we contacted regulators in Washington to find out the terms of the settlement,
we were told the terms were secret, put under court seal at the request of both
the plaintiffs and defendants. If the FSLIC is going to spend a small fortune in
legal fees to sue these people, then they must be prepared to demand settlements
that are not just one more travesty, and those settlements should be made public.

The FSLIC hired a law firm to sue David Butler, former CEO of Bell
Savings and Loan, San Mateo, California," and in the settlement that followed
Butler agreed he was responsible for $165 million in losses incurred by Bell
while he was in charge. Butler had been an extravagant spender, even having
a $6,000 leather toilet seat installed on his corporate jet and reportedly buying
his secretary a new Maserati. The final judgment the FSLIC agreed to, however,
limited Butler's actual liability to $290,000 in cash and to what the judge de-
scribed as some nearly worthless stock. Butler was allowed to keep his $190,000
home and his $40,000 vintage biplane, and the FSLIC agreed to pay him $110
a day for his time and trouble while he cooperated with its investigation. A
federal judge vacated the settlement in 1988, calling it a disgrace and saying.

322 • INSIDE JOB

"The court feels FSLIC owes more of a responsibilih to the American taxpayers."
The legal fees collected by the firm representing the FSLIC in the Bell case
would have dwarfed the quarter million in cash they "recovered" from Butler.
Anyone who admits to causing $165 million in losses should be stripped naked
of assets. But apparently the FSLIC felt that a man and his biplane should not
be parted.

Ethics in government:

The relationships that developed between politicians and thrift abusers consti-
tuted a breach of ethics at best and in some cases smacked of corruption. It's
outrageous that politicians who helped protect and perpetuate much of the thrift
scandal were allowed to wrap their actions in the disguise of "conshtuent service. "
Their real constituents should give them the boot (as Rhode Island \oters did
St Germain in 1988), because those congressmen and senators weren't helping
constituents, they were protecting their financial supporters. When they should
have been guarding the public's interest, they were instead repaying old debts.
And to prove that nothing had changed, the Federal Elections Commission
revealed that in 1988 33? congressmen and 61 senators received donations from
thrift lobbyists. Voters should vote out of office legislators who do not demand
from themselves and others the highest possible ethical standards. When powerful
leaders like Jim Wright can hold up a piece of emergency legislation like the
recap bill, in order to extort concessions for constituents from federal regulators,
they have violated the public's trust (to the tune of more than $100 billion, said
some analysts who believed losses could have been held at $1 5 billion if regulators
could have closed institutions as soon as they became insolvent). If Congress
and the Justice Department haven't the stomach to do what is necessary, then
the voters should.

Appraisers:

Appraisers played a critical role in much of the looting that occurred at thrifts.
Behind nearly every fraudulent loan was a phony appraisal. Time and time again
properties were grossly overappraised to justify large loans that were ne\er paid j
back. At one Southern California thrift, regulators found a half dozen appraisals
on a single piece of property that began at $2 million and went up to $175
million. "The last appraisal even had a big red seal on it," recalled California
Commissioner Bill Crawford. "I'd never seen one with a seal on it. It looked
real official." The FSLIC later sold the property for $2.5 million. States should
license appraisers. Most states now license real estate salespersons and brokers, I
and the slightest accusation of illegality , misrepresentation, or fraud can result

Taking the Cure ■ 323

in suspension or revocation of that license. All states license barbers. Why should
appraisers be any different? Currently, appraisers can belong to private profes-
sional organizations that allow them to put official-sounding letters after their
names, but nowhere are they licensed.

Auditors:

Many thrifts failed not long after receiving perfectly clean bills of health from
their auditing firms. By March 1989 the FSLIC had sued ten accounting firms
that had audited the books of failed S&Ls and more suits were on the way.'"*

• The auditors deflected criticism by saying that their audits could only be as good
as the information provided to them by the thrift's management, and if that
information was fraudulent, they weren't responsible.

When auditors examined a thrift's books, they were not required to look
for fraud, but if they should happen to see any, they were required to report
it to thrift management, which might not be the best move if the thrift
management itself was involved in the scam. Auditors should be required to
look for fraud and to report to federal regulators, who can then confirm the
suspicions and contact the FBI. Auditors also do not now have to include in
their annual audit any suspicion they may have that the company might be
about to collapse. Clearly, they should be required by law or by industry
standards''^ to include such information. If thrift officials pressured auditors (or
promised them rewards) to overlook fraudulent deals or other discrepancies,

I auditors should be required to report the pressure to federal regulators. Auditing
firms that were found to routinely certify thrifts that fail should be barred from
auditing thrifts.

Adjustable rate mortgages:

ironically, the deregulation thrifts most needed in the 1970s was one of the
simplest: allowing thrifts to offer adjustable rate mortgages. The industry lobbied
heavilv for the ARMs in the 1970s, but Congress — trying to please consumers
— refused. '*■ Deregulating interest rates on both the deposit and loan sides would
have allowed thrifts to make all the adjustments they really needed during both
inflationary and deflationary periods. Rates on deposits were finally freed up by
the Depository Institutions Deregulation and Monetary Control Act of 1980,
and rates on loans were freed up in April 1981 when then-chairman of the
FHLBB Richard Pratt authorized thrifts to use ARMs. But by then it was too
late. Forces for thorough deregulation had already been set in motion by the
interest rate crisis of the late 1970s. The savings and loans that did survive the
1980s steered a conservative course, ignored deregulation as much as possible,
and simply took advantage of unregulated deposit and loan rates. "

324 • INSIDE JOB

What we hof)e will come from the thrift industn' carnage is a careful reas-
sessment of what can and cannot be deregulated in this countr\' and a rec-
ognition that deregulation is one thing while unregulation is something else
entirely. Deregulating segments of the financial services industn.' is, condi-
tionally, a good idea. Federal meddling in private financial services, like plac-
ing tariffs and import quotas, can smother the most efficient business and turn
it into a lumbering U.S. Postal Service-type beast. But Congress must learn
to treat financial service deregulation like brain surgery, realizing that if too
much is cut away, the patient will begin acting in bizarre, unpredictable, and,
often, self-destructive ways.

Congress now is besieged with banking industry pleas to deregulate com-
mercial banks.'* Banking lobbyists are clamoring for bank deregulation today
the same way thrift lobbyists clamored for thrift deregulation a decade ago. E\en
their arguments are the same, as bankers complain that they need more "freedom
to compete." They, too, want freedom from what they see as a "regulatory
straitjacket."

In the late 1970s, when thrifts found themselves caught in the interest rate
squeeze caused by inflation, thrifts begged for the right to diversify their invest-
ments. Today banks, being squeezed by ill-advised loan decisions they have
made over the past two decades (loans to Third World countries, in particular),
also want to diversify into fields where they hop)e they can make up the losses,
particularly into undervvriting securities and insurance. They want the restrichve
features of the Glass-Steagall Act removed, and they certainly never mention
that one of the reasons Congress passed the Glass-Steagall Act after the Depression
was that risky transactions conducted between banks and their securities affiliates'"
led to many bank failures when the market crashed in 1929.-" Robert Glauber,
Treasury undersecretary for finance, said in May 1989, "Once we get the thrift
industry legislation passed, we are going to go back to our agenda of structural
reform" (a euphemism for bank deregulation).

Banks are crying for deregulation, but they are not offering to give up federal
deposit insurance or accept a risk-based insurance system. That would be more
"deregulation" than they have in mind.-' And bankers are not offering to pay
for more examiners, examiners trained in the ways of the complicated and risk-
ridden securities industry. What they say they will do is erect .so-called fire walls
that would theoretically keep their federally insured banks separate from their
Wall Street stock-trading operations. But when the stock market crashed in
October 1987, Continental Illinois National Bank and Trust in Chicago^'
promptly lent its option-trading subsidiary over $90 million to cover margin
calls, in direct violation of an existing fire wall.-' For another example of fire

Taking the Cure • 325

walls that didn't work, we have to look no further than the thrift industry: Thrifts
were limited in the amount of money they could loan to themselves or to their
own projects, so they found other thrifts who wanted to play and they made
quid pro quo loans back and forth to each other. Banks, too, will work out back-
scratching arrangements with their friends. So much for fire walls.

It's hard to believe Congress would contemplate significant deregulation of
banks before they have come to grips with the monumental mess they created
by deregulating thrifts. And look who's giving Congress advice on the subject
— Alan Greenspan, chairman of the Federal Reserve Board. He assured Congress
in 1988 that deregulating banks and abolishing the 55-year-old Glass-Steagall

' Act was a great idea and held nothing but benefits for the nation and for banking.
Just four years earlier the very same Alan Greenspan had advised Ed Gray to

1 stop worrying so much about deregulated thrifts because things were just fine
and would only get better.

Swindlers have always targeted banks, but with mixed success prior to de-
regulation. An FBI agent in Texas told us, "The only difference [between banks
and thrifts in Texas] is that the FDIC still has its head in the sand. When I
looked at the banks that closed between 1984 and 1987, in many of them I
found people I knew, the same S&L crowd I'm investigating from the failed

I thrifts here." Attorneys at private law firms who worked for both the FDIC and
the FSLIC told us the same story.

About bank deregulation, U.S. Attorney Joe Cage said, "Some of the same
people who took down savings and loans, they're out in the securities business
and banking, already in place, just waiting for Congress to abolish the Glass-
Steagall Act. When it happens I'm afraid they'll take the banks just like they did
the savings and loans."

1 Our conclusion that S&Ls were in large part looted by a hit-and-run network
that would pose the same threat to deregulated banks was reinforced by the
Housing and Urban Development (HUD) scandal breaking as this book went to
press. While the national press focused on powerful Republicans who got huge
consulting fees for pedaling their influence with insiders at HUD (for HUD
approval of their clients' projects and the low-interest loans and tax credits such

I approval carried), we saw other patterns emerging:

' The ethics report on Speaker Wright said that in 1983 he personally appealed
to HUD Secretary Samuel Pierce for approval of a HUD grant to help a company
owned by Wayne Newton, Billy Bob Barnett, William Beuck, Steve Murrin,

' Don Jury, and others restore the Fort Worth stockyards. When the application

' was denied, Wright got Senator Paul Laxalt to write to Pierce in support of the
grant and the project was eventually approved. (It later went into bankruptcy in
spite of efforts by Wright's friend George Mallick to bail it out.)

An FBI affidavit filed in a Washington, D.C., court (in support of a request

326 • INSIDE JOB

for a warrant to search the offices of DeFranceaux Rcalt>' Group [DRG] and its
affiliates) revealed that the Justice Department beheved DRG (approved by HUD
to act on its behalf) in 1988 sold repossessed property' to Southmark at below-
market value (for example, Southmark paid $2.3 million for Dallas property
DRG had loaned $6.4 million on just hvo years earlier). At the time DRG was
trying to get a $1 5 million loan and a $25 million line of credit from San Jacinto
Savings and Loan, a Southmark subsidiary. HUD was liable for 85 percent of
the "loss" on such sales.

The affidavit also claimed that in September 1984 DRG loaned Colonial
House Apartments in Houston $47 million based on DRG's appraisal that the
projjerty was worth $60 million. In 1988 DRG had to foreclose. A few months
later HUD appraisers said the apartments had been only 6 percent rented when
the loan was made and were worth at that time only $13 million, not $60
million. In 1989 HUD estimated it would lose over $35 million on the deal.
The Houston Post reported that Colonial House Apartments apparently was
owned at least part of this time by a limited partnership (in a tax-shelter invest-
ment) headed by a group of s\ndicators that included Howard Pulver. Pulver's
group in 1984 and 1985 sold $333 million in mortgages (appraised at the time
by the county for only $192 million, according to the Post) to Mainland Savings
in Houston, where Martin Schwimmer and Mario Renda placed some of their
pension deposits and where Adnan Khashoggi also did business (in 1985, for
example. Mainland reportedly paid Khashoggi $80 million for 21 acres the
county was appraising at only $41.5 million). Repxjrter Pete Brewton discovered
that Pulver li\ed practically across the street from Schwimmer in an exclusive
Long Island neighborhood, yet the two men did not admit to knowing each
other. Mainland collapsed in 1986.

In 1988 Charles Bazarian was actively involved in locating property that
qualified for HUD tax credits. It was then packaged and sold as tax shelters. The
FBI was said to be investigating Bazarian's relationship with HUD.

So the S&'L and HLID scandals were not hvo separate stories. They were
the same story. The fund that insured HUD's Federal Housing Administration
(FHA) mortgages was reported to be at record lows and whispers of another
taxpayer bailout had begun.

Would banks be next?

Those considering bank deregulation should go slow. Very slow. Keeping
in mind that hvo simple, well-thought-out adjustments — flexible deposit rates
and adjustable rate mortgages — were all that was needed in the 1970s to save
the thrift industry, while sweeping deregulation and expanded powers destroyed
it. Deregulation is powerful medicine. A little goes a long way.

And the money lost in the savings and loan crisis, as horrendous as it is,
would pale beside a similar fleecing of the banking industr)': I here were only
3,200 savings and loans in the United States, but there are over 14,000 banks.

Taking the Cure ■ 327

j We leave this project knowing this will probably be the most important story
the three of us, as journalists, will ever work on.

We have tried to give the reader a sense of the vast scope and depth of this
jscandal, but there was no way we could cover ever>'thing in the space allowed.
iWe investigated many more failed thrifts than we could mention in this book.
For every scam we chronicled, we left a hundred out. For every connection we
^made between key players, organized crime figures and thrifts, we had to leave
(dozens out. it would have literally taken several volumes to chronicle this story
in its totalitv'. There was so much more that we would have liked to have told
.you.

We began this project as seasoned reporters, but we were not prepared for
the depth of corruption and the pervasiveness of white-collar crime that we
found. "Somefirnes I think the only thing keeping this economy going anymore
,are bust-out scams," a business reporter quipped to us one day. The words of
;one exhausted FBI agent seemed to sum it up: "Trouble today is that too many
jpeople in business are just no damn good."

I But besides the criminality we discovered a pervasive feeling that anything
Inot actually illegal or specifically prohibited by thrift regulation was fair game.
Traditional standards of right and wrong were ignored. Too many people in the
thrift industry simply sold their fiduciary responsibilities to the highest briber.
Whatever had infected Wall Street in the 1980s found its way into S&Ls as
JA-ell — a burning greed that consumed long-standing American ethical standards.
j "An ethical person is someone who does more than is required and less than
IS allowed," said Michael Josephson, former law professor turned ethics teacher.
The thrift rogues turned that maxim on its head. If this book has a message, it
iS that the fabric of American society is being systematically weakened by the
ijrowing number of people willing to sell their values and principles for a fast
buck.

j But perhaps most dangerous of all was the willingness of honest people to
jolerate, rationalize, and even do business with the crooks. Erv Hansen could
liever have flown as high as he did for three years without the cooperation of
;Tiany people in Sonoma County, California. As a respected Nevada judge said:
I "It won't be the bad people who destroy this country. It'll be the good people
vho rationalize the bad people's conduct."

Il

Epilogue

As we finished our investigation we looked back at what had become of the key
players in our drama. The answer was — not much.

Erv Hansen died in his sleep, uncharged of any crime, after nearly two
years of FBI investigations. His victim. Centennial, on the other hand,
lay dead with a $165 million hole in her broadside.

Hansen's accomplice, Beverly Haines, spent just 67 days (of a five-year
sentence) in prison before a soft-hearted federal judge (Robert Peckham)
released her to a halfway house in San Francisco, where she was allowed
to dine out at local restaurants. At press time she was spending her
weekdays in the halfway house and going home on weekends.

Sid Shah was indicted for drug-money laundering, but he was not in-
dicted in connection with the Centennial case. The FSLIC sued him
to try to recoup some of its losses at Centennial, and both the drug trial
and the FSLIC civil case were pending at press time. (In April 1989 the
government's key witness in the drug case, Michael Stevenson, was
reported missing.) The FBI said their investigation of Shah's activities
at Centennial remained open and active, but at press time, over four
years after Centennial closed. Shah remained uncharged with any wrong-
doing involving Centennial's downfall. He was living and working in
Santa Rosa.

Noiman Jensen cut a deal with federal Organized Crime Strike Force
prosecutors for some level of immunity in the drug-money-laundering
case. Since it wasn't a crime at the time, Jenson wasn't prosecuted for
paying thrift president Guy Olano a $50,000 kickback — Jenson called

328

Epilogue ■ 329

if a legal fee — in return for his $4 million casino loan. At press time
jcnson continued to live and work in Las Vegas.

The Soderling brothers pleaded guilty to bank fraud and were sentenced
to seven years in prison with all but one year suspended. They were
released in late 1988 after serving about six months.

Robert Ferrante of Consolidated Savings and Loan, which failed in
1985, was the subject of a disorganized, on-again off-again FBI inves-
tigation and remained uncharged at press time. He hired a public re-
lations person to take his calls and aggressively maintained his complete
innocence.

Jack Bona and Frank Domingues, who, regulators said, pulled $200
million out of San Marino Savings in loans secured by only about $100
million in property, settled with the FSLIC before their civil trial began.
That settlement was sealed upon the request of both the defendants and
the FSLIC and neither would disclose how much, if anything, the pair
agreed to repay. Neither man was charged criminally. The U.S. attorney
declined the San Marino case reportedly because FHLB examiners had
failed to supply the FBI with the necessary evidence. Bona disappeared
after his fling at the Atlantic City Dunes. At press time Domingues,
authorities told us, was still the subject of an ongoing FBI investigation
for loans he got from South Bay Savings and from Vernon Savings, but
he remained uncharged.

Ed McBimey, former CEO of Sunbelt Savings and Loan (a $2 billion
failure), started a new investment firm in Dallas. By press time he had
not been charged with any wrongdoing. The FSLIC sued him for $500
million, and the case was pending at this writing.

Tom Gaubert, Representative Jim Wright's friend and fund-raiser, was
charged with bank fraud at an Iowa thrift but he was found innocent.
At press time Gaubert was working in Dallas.

Charlie Knapp, former head of $30 billion FCA, the failure of which
cost the FSLIC nearly $2 billion, formed Trafalgar Mortgage in Los
Angeles in partnership with Larry Taggart, the former California savings
and loan commissioner. At press time they were packaging mortgages
and selling them on Wall Street as mortgage-backed securities.

Don Dixon, the former head of Vernon Savings and Loan, had not been
charged at press time but was the focus of an ongoing FBI investigation.
The Wall Street Journal reported that he was "dabbling in offshore in-
surance companies and playing golf at the La Costa Hotel and Spa."

330 • Epilogue

Herman Beebe pleaded guilty and was sentenced to one year and a day
in prison. He also got immunity from additional prosecution for whatever
he may or may not have done at dozens of failed thrifts and banks in
northern Texas and western Louisiana.

Mario Renda faced a potential 25-year prison term as part of his plea
bargain in the pension-fund bribery and enibezziement case in Brooklyn.
After testifying against his former associate, Martin Schwimmer, Renda
was given a five-year sentence and ordered to repay over $10 million in
restitution to the FSLIC and the FDIC. In Kansas City, where he had
pleaded guilty in the Indian Springs State Bank and Coronado Savings
ca.ses, he got two years, to run concurrent with the Brooklyn five, and
five years probation. Ditto for his five-year Florida Center Bank sentence.
At worst, Renda probably faced no more than 42 months in a country-
club federal facility.

Charles Bazarian received a five-year sentence for his in\ol\ement with
Rapp at Florida Center Bank. At press time his appeal had just been
denied and he was living and doing business out of his Oklahoma City
mansion. Bazarian, according to federal sources, cut a deal earlv with
the Justice Department. Though the terms of the deal remained con-
fidential, sources told us Bazarian wanted total immunity from prose-
cution for anything he did at thrifts in return for his testimony against
others. He also agreed to plead guilty to some nonthrift-rclated frauds
involving HUD deals. Bazarian confirmed to us that he had been given
immunity but would not elaborate. "I can't tell you an\ more. My life
might be in danger," he said. Meanwhile, when CBS's 60 Minutes
tracked him down in February 1989, they found him in a New York
City hotel suite equipped with four ringing telephones. Assistants buzzed
in and out with stock buy-and-sell slips.

Michael Rapp took the hardest fall. His abuse of the federal witness
protection program was a major embarrassment to federal prosecutors.
He was sentenced to 32 years for his involvement at Flushing Federal
Savings and Florida Center Bank and was expected to serve about eight
years.

Sam Daily (Renda and Franklin Winkler's associate in the Indian Springs
State Bank deal) was sentenced to five years in a federal facility.

At press time Franklin Winkler was still fighting extradition from Aus-
tralia. His father, Leslie, died of natural causes in Israel while awaiting
extradition to the United States.

Epilogue • 331

Tyrell Barker pleaded guilh- to misapplication of bank funds and was
sentenced to five vears in prison with all but six months suspended.

Loan broker Jack Franks was charged with bank fraud, pleaded guilty,
and agreed to cooperate with tiie government. Franks was sentenced to
five years in prison.

Tom Nevis, Tvrell Barker's associate, convicted on 28 counts related to
bank fraud at State Savings and Loan of Corvallis, Oregon. Nevis re-
ceived a two year sentence, no fine.

Jilly Rizzo was indicted in May 1989 for using overvalued security as
collateral for loans. His trial was pending at press time.

Judge Edmund Reggie was indicted for bank fraud in May 1989 and
his trial was pending at press time.

Endnotes

Original Sin

1. Ivan Boesky pleaded guilty in 1986 to insider trading and securities fraud in one of
the most celebrated white-collar crime cases in the nation's history, and he implicated Drexel
Burnham Lambert and their junk bond king Michael Milken. Dan Walker pleaded guilty to
bank fraud in 1987. Neil Bush's and Andrew Cuomo's forays into the bright new world of
deregulated savings and loans ran into troubles of a different sort: Bush resigned as a Silverado
Savings director just days after his father was nominated as the Republican candidate for
president and three months before Silverado had to set aside $275 million to cover expected
losses (regulators finally seized Silverado in December 1988), and Cuomo's investment group
became entangled in a bitter lawsuit with the chairman of a related thrift. (They reached a
settlement in 1988.)

2. The Federal Home Loan Bank Board, a quasi-independent agency in the executive
branch of the federal government, is responsible for all federal regulation of savings and loans.
Gray became chairman in May 1983.

3. By April 1989 the Justice Department had convicted over 100 people in relation to
the 1-30 scandal and more convictions were expected.

4. The Federal Savings and Loan Insurance Corporation insured deposits at member
thrifts.

5. The FHLBB's definition of insider abuse and fraud included breach of fiduciary duty,
self-dealing, engaging in high-risk speculative ventures, excessive expenditures and compen-
sation and conflicts of interest, among others.

6. The General Accounting Office is the auditing arm of Congress.

7. Among them was the Federal Deposit Insurance Corporation which insures banks and
some savings banks.

8. Centennial's net worth at the time was $1.87 million.

9. The National Thrift News was awarded the 1989 George Polk Award in Journalism
for Financial Reporting for its coverage of the savings and loan industry.

332

Endnotes ■ 333

Chapter I. A Short History Lesson

1 . The Kedcral Reserve System also loaned money to banks when deposits were in short
supply, but thrifts had no such source for funds and had to borrow from banks, their prime

■■ competitors, when they needed extra money.

2. Mortgage foreclosures increased from 75,000 in 1928 to over 275,000 in 19^2, as
Americans were increasingly unable to meet their house payments and thrifts were left holding
mortgages on property that was worth less and less as the Depression deepened.

3. The thrifts were members of their regional FHLB.

4. Congress created the Federal Deposit Insurance Corporation (FDIC) to perform the
' same function for banks and the National Credit Union Share Insurance Fund for credit

unions.

I 5. Membership was mandatory for federally chartered thrifts, optional for state-chartered
'thrifts. In ensuing years S&Ls consolidated and gradually joined the FSLIC until in 1987

there were 4,600 savings and loans — 2,000 federally chartered, 2,600 state-chartered, and only

600 not insured by the FSLIC.

6. Inflation in the U.S. had traditionally fluctuated in a range below 5 percent. The rate
from 1959 through 1969, for example, averaged 2. 3 percent. But when OPEC flexed its muscle
in the early 1970s, oil prices rose and so did inflahon. In 1972 inflation was at 3.4 percent,
in 1974, 12.2 percent, in 1979, 13.3 percent.

7. The interest rate ceiling established in the 1960s limited thrifts to paying only 5.25
percent interest on passbook savings accounts, raised to 5.5 percent in July 1979. Rate ceilings
on time deposits of $100,000 and over had been phased out in the early 1970s.

8. Investors could place any amount of money in money market funds anytime they
wanted, earn rates that were even with or greater than the inflation rate, and withdraw their
money anytime they wanted.

9. Even when inflation began to abate in the early 1980s, the public believed it would
return and they continued their flight from thrifts. The public was also withdrawing their
savings from banks.

10. TTie first major legislative effort by Congress to deregulate federally chartered S&Ls
I came in 1973, but the movement failed. Instead, throughout the 1970s the FHLBB and

Congress continued to tighten regulations. But the support of deregulation grew as those new
! regulations failed to stem thrift losses.

11. In 1974 the ceiling had been increased from $20,000 to $40,000.

12. Lyndon Johnson's protege, Bobby Baker, convicted of stealing $100,000 and evading
taxes in one of the most publicized political scandals of the 1960s, wrote in his book Wheeling
and Dealing that Troop gathered money from S&L executives and funneled the money through
Baker to pay off a senator for killing some legislation the executives opposed. Troop died in

1982.

13. Thrift lobbyists were said to have more influence over their regulators than any other
regulated industry, and the U.S League had traditionally participated in regulatory and leg-
islative decisions, even going so far as to write some of the regulations. Bankers complained
that they did not get treated as generously by Congress as did savings and loans because their
lobbyists were not as powerful.

334 • Endnotes

14. And a wide varieK of otiicr kinds of accounts.
1 5 Up from 20 percent.

16. In opening up nonresidential real estate lending to thrifts. Congress was blurring one
of the key differences between banks and savings and loans: banks traditionally made commercial
real estate and construction loans and thrifts were supposed to stick to home mortgages.

17. Technically, from that moment forward the American taxpayer was on the hook for
thrift industry debts, but as a practical matter Congress could not have allowed the savings
and loan industry to collapse, with or without the )oint Current Resolution, because such a
massive default would have posed too much of a threat to the countrv's financial stability.

18. In 1978 Congress passed the Change in Control law, which gave regulators the right
to deny an application for a thrift charter, but in actual practice regulators exercised control
over directors and officers but not owners. The FHLBB maintained they couldn't disapprove
applications unless there was hard evidence of incompetence or vsrongdoing, and they believed
they should not limit the freedom of stockholders to sell their institutions.

19. This change was authorized by the Garn-St Germain legislation but did not take
effect until August 1983.

20. This FSLIC regulation took effect in 1980.

21. Entrepreneurs could start a savings and loan for S2 million (raised to $3 million in
1983) or buy an old one; attract, say, $300 million in brokered "hot money " deposits; loan
that $300 million on trendy condominium units; pocket $18 million in points and fees; package
the loans and sell them to other thrifts; and start all over.

22. Starting salaries in 1984 were $14,000.

23. Regulation and examination were two separate functions. Examiners were fact finders;
regulators made the decisions.

Chapter 2. Shades of Gray

1. Pratt, chairman of the FHLBB from 1981 to 1983, was called by many in the thrift
industry "The Savior of the Industry " because he presided over much of the deregulation of
savings and loans.

2. The Federal Reserve Board, which is the Federal Home Loan Bank Board's counterpart
in the world of banking, has no such partisan staffing requirements. Many believe some of
the thrift industry's problems stemmed from the politicizing of the FHLBB.

3. Paul Volcker was the highly respected chairman of the Federal Reser\e Board from
1979 to 1987.

4. And they still do.

5. CDs had terms that ranged from as long as I 5 years to as short as 30 days. The long-
term brokered CDs were not considered a problem. The short-term CDs were.

6. This was especially true of thrifts chartered in states where regulations were even more
lenient than on the federal level.

7. The FDIC insured deposits placed with banks.

Endnotes ■ 335

8. Isaac was chairman of tlic FDIC from 1981 to 1985. Me was succeeded in that post
bv L. W'ilham Seidman.

9. Federally chartered S&Ls were required to join the FSLIC.

U). Oil prices collapsed in late 1985 and early 1986 and the Texas economy sank into a
devastating depression.

1 1. Cnrlee. by the way, once attended an S&L party dressed as Elvis Presley, wearing a
gold and rhincstonc-studded jump suit.

12. Democratic Governor Edmund Brown, )r., 1975-1983.

B. In 1978 California had 172 state-chartered institutions. That dropped to 55 by 1983.

14. In 1988 Nolan, an assemblyman from Glendale who became Assembly minority
leader, resigned his position as minority leader on reports that he, among other state legislators,
had been targeted by an FBI sting operation investigating influence peddling and political
corruption. Nolan denied all wrongdoing, saying he was resigning because his party lost two
Assembly seats in the November election. Assemblyman Bill Filante told the Santa Rosa Press
Democrat. "He's under a lot of stresses."

1 5. According to their seminar outline.

16. Larry Taggart had been a vice president of Great American First Savings Bank in
San Diego.

17. The weapon used to murder Masegian was a 32-inch nylon cord with wooden knobs.
The FBI said the commando-stvled method for death had not been used in the United States
for 16 years. "I can't remember another case like this one, " said the Dade County medical
examiner.

18. A tiny island cluster in the Caribbean south of Cuba.

19. Texas and California were by no means the only states with problems. Wyoming,
which had relatively few total cases, had the most bank fraud per capita in the nation.

20. The FSLIC insurance fund got its money from member thrifts who made payments
to the fund, but it was also backed by the full faith and credit of the U.S. government, which
meant that when the fund ran out of money, taxpayers would have to cover the losses.

Chapter 3. Centennial Gears Up for Deregulation

1. Norman Raiden, general counsel to the FHLBB during the Gray years, told us that
of the failed savings and loans he was familiar with, the one he had the hardest time under-
standing was Centennial Savings, because Hansen had been so well known in the thrift industry
and had had such a good, and conservahve, reputation.

2. Piombo Corporation was owned by Piombo Construction Company.

3. This was a common practice among lenders and only became a problem for thrifts
when faulty appraisals were used to justify loans much larger than the value of the collateral.

4. This bookkeeping anomaly resulted in the most desperate thrifts making the most, the
largest, and the riskiest loans in an attempt to make the S&Ls' financial statements look
better — or to give the borrowers a couple of years getaway time.

5. Prior to deregulation, boards of directors of thrifts were mainly figureheads who typically

336 ■ Endnotes

rubber-stamped management's requests. Primarily for that reason, they were unprepared to
assume the tougher role that deregulation thrust upon them, and they contmued rubber-
stamping for far too long.

6. An attorney working on a related case told us he had discovered that the BI.A violated
regulations and failed to exercise prudent fiduciary care in investing the trust-fund money.
Federal officials knew about his discoveries, he said. The BIA admitted their record keeping
was madequate and they computerized their system. But as far as we could tell, no one had
investigated the charges of bribery. We notified the Office of the hispector General of the
U.S. Department of the Interior ourselves and an investigator sp)enf a day with us. promising
to conduct a thorough review. Later he said the case was "very big " and had high priority
with his department. But it was all hush-hush, he said, so he couldn't tell us the details. Still,
we'd be the first to know when arrests were made. Up to press time, a \car later, there were
no further developments.

7. The limit that a thrift could loan to one borrower varied from thrift to thrift, based
on a formula established by regulators. Golden Pacific's limit at that hme. according to a
former loan officer, was $500,000.

8. TTie FSLIC later sold the building for an undisclosed sum under $1 million.

Chapter 4. $10,000 in a Boot

1 . In response to our questions about his loans from Centennial, Bosco wrote to McGraw-
Hill, the publishers of this book, and admitted to receiving two loans that totaled less than
$200,000 in 1979 and 1980 ("before any scandal attended the operation of Centennial." he
wrote) but he failed to mention the two loans totaling $124,000 that he got in 1982 and 198?,
while Hansen was riding high.

2. In an advance-fee scheme a middleman promised to get a borrower a loan if the
borrower would pay the middleman an up-front fee. Of course the middleman took the fee
and disappeared and the borrower never saw the loan. A U.S. attorney told us he had decided
that S&L deregulation had permitted an updated version of the advance-fee scheme: Now
middlemen could actually produce the loan by setting the borrower up with a cooperative
thrift.

3. Senator Dolwig, Kaplan, and Gorwitz formed a company on Grand Cayman Island
that offered to obtain large loans for prospective commercial borrowers who were ha\ ing trouble
finding a willing lender. In return for a loan guarantee borrowers would pay the company
$25,000 for every $1 million of financing requested. But when borrowers paid the fees Gorwitz
flew the money to Freeport, in the Bahamas, where it disappeared, presumably into the coffers
of fugitive mobster Salvafore Caruana. The borrower, of course, would never get the promised
loan, .admitted hitman Jimmy "the Weasel" Fratianno said in his biography that Gorwitz and
his partners had tried to interest him in joining them in the scam, but Jimmy, a veteran of
scams, predicted that Kaplan was out of his league and would end up taking a fall on the
scam, which was precisely what happened.

4. In 1986 Binder declared bankruptcy and Centennial (by that time having been taken
over by the FSLIC) sued for relief, stating that Binder had pledged to them security he had
already pledged for other loans, listed real estate he did not own. and counted his home twice
on his financial statement, once as his personal residence and again as "real estate." In his
bankruptcy Binder listed his total unpaid debt at $5,851,755.45. He claimed cash on hand at
the time of filing at just $239.

Endnotes • 337

5. This figure docs not include the hundreds of thousands of dollars the KBI would later
discover Hansen was enibc/zling from Centennial and borrowing from Cokuubus-Marin as
well.

6. The FHLB's Eleventh District encompassed California, Arizona and Nevada.

7. Alexander Grant later changed its name to Grant Thornton after it became enmeshed
in a scandal in which a managing partner in Klorida pleaded guilty to accepting $225,000 in
bribes to falsify' financial statements for ESM Government Securities Inc. and hide ESM's
shaky financial situation.

8. After the deal between Atlas Savings and Columbus-Marin Savings that let Hansen
and Shah take $16 million in bonuses in 1984, auditors gave Centennial a clear audit even
though a Centennial executive told Pizzo the contracts clearly indicated that Centennial had
agreed to buy the properties right back in early 1984.

[i Chapter ?. The Downhill Slide

I 1. They also had to agree to submit a detailed business plan to regulators and tighten up

• their investment procedures and policies. Regulators didn't issue many supervisory agreements
' until 1984 when Ed Gray, upset with lax enforcement, msisted that regulators crack down on
k wayward thrifts. That year they issued 116, including Centennial's.
I

2. The $'?S notes had the effect of creating an artificially high price for Centennial stock.
Since Hansen had Centennial stock pledged as security for loans, he had to keep the price of
the stock as high as possible.

3. The FHLBB is the regulatory agency that closes insolvent thrifts, whether state or
federal, when they are insured by the FSLIC.

4. Regulators consider it normal for up to 20 percent of a thrift's deposits to be brokered
deposits.

5. The interim management team from Great Western Savings and Loan, baby-sitting
i Centennial for the FSLIC after the takeover, discovered Bev's check-kiting scheme.

I 6. Federal sources later told us that Bank of America was less than cooperative in their
investigation into the Haines matter.

7. She also granted us several interviews.

8. Joseph P. Russoniello, U.S. attorney for the northern district of California, said that
of the 400 persons prosecuted federally for bank embezzlement in his district since 1983, half

I reported drug use or alcohol abuse.

9. One month earlier two Golden Pacific loan officers had become part of a small group
who, according to a federal indictment, first bought and then defrauded Bank of Northern
California in San Jose out of nearly $2 million in just 16 days before regulators threw them
out. The group allegedly made their last payment for the purchase of the San Jose bank with

' $700,000 cash which, authorities said, the group's leader, Rodney Wagner, delivered in a
I satchel. Later Wagner was indicted by Organized Crime Strike Force attorneys who accused
! him of being a major international drug-money launderer. John L. Molinaro, owner of Ramona

Savings in Ramona, California, who was arrested trying to flee the country using a dead man's

passport, was also a shareholder of Bank of Northern California.

10. Attorneys working the criminal side of the investigation forged ahead as well, and a

I

338 ■ Endnotes I

year later Hansen's friend at the head of Columbus-Marin Savings, Ted Musacchio, was
formally indicted by a federal grand jury on two counts of misapplying bank funds and two
counts of receiving benefits from bank transactions, a euphemism for allegcdiv taking S40,000
in kickbacks for arranging loans to Kr\ Hansen. A few months after that indictment he was
indicted a second time on charges that he conspired with a couple of developers to defraud
Columbus Savings. Musacchio's attorney said the charges were "outrageous. "

1 1 . One of those indicted along with Shah was a James Schlichtman, who, the indictment
alleged, had distributed drugs for the ring. An IRS affidavit said Schlichtman had also worked
for San Francisco investment advisor W. Franklyn Chinn from 1985 through 1987. Chinn,
Attorney General Ed Meese's former financial advisor, would later become the focus of an
intense federal investigation into Mcese and the defense contracting firm of Wcdtech Cor-
poration. The IRS affidavit said Schlichtman was cooperating with the W cdtcch investigation
under an inmiunity agreement.

12. This loss of experienced prosecutors to private practice was a major problem facing
the overworked and understaffed justice Department.

n. Regulators could put insolvent thrifts into conservatorships or receiverships. The
purpose of a conser\atorship was to keep the institution open and operating while a new
management team tried to "conscnc " the thrift's assets. A recei\ership was instituted when
the institution was beyond repair. When the FHLBB took over Centennial Savings in 1985
and removed Erv Hansen and his team, they placed the S&L in a conservatorship. They
brought in a team from Great Western Savings and Loan to operate Centennial from the time
of the takeover in August 1985 until its purchase by Citizens Federal in April 1987. When
Citizens Federal purchased Centennial, Centennial's assets were transferred to a receivership,
a FHLB team that would slowly liquidate those assets, while Citizens Federal opened shop in
the old Centennial offices.

14. The Citizens Federal purchase of Centennial gready slowed the forward march of
the FSLIC's civil suit against the Centennial defendants. The Great Westem team managing
Centennial had employed a law firm to help them conduct an investigation. When Citizens
F'ederal bought Centennial, the Great Western team went back to Great Western and a federal
receivership team picked up where they left off. The receivership hired a different law firm,
which then took months to get up to speed on the complicated case. We found that this kind
of duplication of effort was common.

15. According to reporter Allen Pusey of the Dallas Morning News.

Chapter 6. Lazarus

1. Federal regulations allowed only 40 percent.

2. Ferrante told us later, when we talked to him by telephone, that he had at one time
looked into the possibility of purchasing Golden Pacific Savings from the Soderlings, but it
had not been strong enough financially to suit him.

3. The Israeli Mafia is said to be headquartered in Los Angeles.

4. The bribes were allegedly funneled through a complex web of subcontractors who then
passed the money back to Mitchell, according to the indictment.

5. Patrick Connolly was acting state savings and loan commissioner when Ferrante applied

Endnotes • 339

for a charter. A year later lie retired to become an officer for Centennial Savings while its
CEO, Erwiii Hansen, looted it into insolvency.

6. Ferrante's associate in the Carson deal, and others, was W. Patrick Moriarity, the
manufactnrcr of Red Devil fireworks, who founded the Bank of Irvine. The bank failed in
1984, the victnn of fraud and misnianagenicnt, according to regulators. In 19H5 Moriarity
pleaded guilty to mail fraud in a case that became the biggest political scandal in California
in 30 years. Over 10 prominent politicians, including one state senator, were indicted for
taking bribes from Moriarity.

7. Although the FSLIC claimed Consolidated loaned just over $1 5 million on the Carson
property, the thrift had actually committed to loaning the project $20 million. Appraisers later
told regulators the property was worth only $6.2 million. Angotti told us the KSLIC had hired
appraisers who purposely underappraised the Carson property.

8. "Participations." loans sold to other institutions, were an accepted (and perfectly legal)
way for an institution to manage its loan portfolio. An institution that needed to get rid of a
loan (because it exceeded the loans-to-one-borrower rule, for example, or just to raise additional
capital) could .sell all or part of the loan to a thrift that was looking for an investment. The
selling thrift improved its cash flow and the buying thrift improved its portfolio of loans.

9. These two institutions would make headlines nationwide and come to ignominious
ends two years later when United Federal was declared insolvent and closed and SlSCorp was
forced into involuntary bankruptcy, both in 1987.

10. The commission paid to loan brokers was negotiable. Sometimes if was paid by the
lender in return for bringing the thrift a valuable borrower or deal. In other cases the borrower
paid the loan broker out of his loan proceeds as thanks for finding him a lender. In other cases
the lender and borrower shared the cost of the commission. Or the loan broker was sometimes
given a percentage of the project or future profits as his commission.

11. Phoenix Federal Savings and Loan of Muskogee, Oklahoma, sued him for a scheme
it claimed defrauded several S&Ls out of millions of dollars, according to published reports.

12. Among them were the following S&Ls: Homestead in Oklahoma City, Freedom in
Tampa, Sunbelt in Dallas, Vernon in Dallas, Phoenix Federal in Muskogee, Oklahoma.

13. A F'HLBB attorney described Charlie's alleged transgressions this way: "A prime
example of borrower misconduct was discovered at Consolidated, where the former manage-
ment (Ferrante) made a loan and participated in advances in the amount of $9 million to a
corporation owned by a convicted felon by the name of Charles Bazarian. These advances
were made without any loan application and financial information, and they were made with
only cursory, one-page letter opinions from the appraisers as to the value of the secured property.
Not one payment was made on these loans and they appear to be substantial — if not total —
losses."

14. When we interviewed Bazarian we had to consciously struggle against the temptation
to like him, to care about his mounting troubles, even his health. He, like other white-collar
con men we met during our investigation, has about him a kind of magic, a psychic novocaine
that dulls the senses and relaxes the listener. We recalled Assistant U.S. Attorney Peter
Robinson, who told us that whenever he was with Beverly Haines he "always felt he should
be doing something for her." Bazarian was a master of that old black magic. But we got an
interesting insight into his thinking when coauthor Mary Fricker asked him if the deal he was
working on at the time was honest. "Sure," he replied. "It's just a scam."

340 ■ Endnotes

15. Angotti said he believed the FHLBB had a vendetta against him because he fought
vigorously for the rights of small thrifts and ran I unsuccessfully I for election as a director of
the Eleventh District FHLB in San Francisco in 1985. He also was a supporter of deregulation.

16. If regulators determined, in an examination of a thrift, that problems were developing
at the institution, they would send the institution a supervisory letter that asked for corrections.
If improvements weren't forthcoming, regulators would enter into a supervisory agreement
with the thrift's officers in which the officers had to agree to follow the regulators' instructions.
If that didn't work, regulators could issue a cease-and-desist order. If the cease-and-desist order
was ignored, officers could then be removed from their jobs. At each step in this process there
were innumerable opportunities for challenge and delay.

17. FSLIC vs. Ferrante et al.

18. After Pizzo interviewed Angotti, Angotti sent him an invitation to join the Italian-
American Foundation, which he co-chaired with U.S. Congressman Dante Fascell "Would
be great to have you among the Italian-American leadership, " Angotti wrote on the uivitahon.
"By honoring others we honor ourselves. "

19. Virtually every "entrepreneur" at the helm of a savings and loan that ran into trouble
with regulators sang the same tune.

20. In a memo written by a California state examiner after the takeover, the examiner
explained. "I spoke to the examiner in charge of the first exam who indicated that the Newport
police called the Department of Savings and Loan to schedule a meehng concerning how
officers of Consolidated were intertwined with various individuals suspected of being affiliated
with the 'Mob.' . . . Apparently, the police were following Ferrante and Angotti."

21. The reporter sent the 1987 Christmas card to us. and we tacked it up on our bulletin
board beside Angotti s invitation to Pizzo to join the Italian-American Foundation.

22. Then director of the FBI.

25. When the FSLIC estimated its loss on a thrift failure, the figure included the cost
of repaying all the money on deposit at the time of closure, losses on direct investments made
by the thrift, legal fees, and receivership expenses, all of which the FSLIC had to pay. The
loss figure was typically much larger than the amount of any suit they might bring against the
people they believed were responsible for the thrift's insolvency.

24. Fifteen percent of the thrift industn's loss in 1987 was in Orange County in Southern
California, where Consolidated was located. The county was in the midst of an economic
boom, so the failures could not be blamed on a recession.

Chapter 7. Back in Washington

1. Penn Square Bank, a small shopping-center bank in Oklahoma City, failed in 1982
after financing much of its risky lending with brokered deposits. Its demise threatened Con-
tinental Illinois National Bank and Trust Company in Chicago, which had to be bailed out
by the federal government to the tune of $4.5 billion, the largest federal bailout in bank history,

2. Limits on brokers' commissions were not removed until 1982, however, so it wasn't
until 1982 that the use of brokered deposits really skyrocketed. The Depository Institutions
Deregulation Committee chaired by Don Regan removed the limits.

Endnotes "341

S. Richard Pratt. Gray's predecessor as chairman of tlic I'llLBB, became head of the
mortgage-backed securities department for Merrill Lynch after he resigned from the KHLBB.

4. Blain was an KHLB director for four years (1979 to 1982), vice chairman of the FHLB
of Dallas, and a prominent member of the Texas Savings and Loan League before his two-
year stint as chairman (1982 to 1984) at Empire Savings netted him and six others an 88-
count indictment on charges of racketeering and fraud. Regulators reported the 1-50 condo
loans had been supported by doctored appraisals and land flips. Prosecutors charged that Texas
developer D. L. (Danny) Faulkner — a sixth-grade dropout who professed not to be able to
read or write, according to reporter Allen Pusey — and associates bought land along 1-30,
flipped it among themselves to artificially inflate its value (in one case the value of 1 17 acres
reportedly increased from $5 million to $47 million in a few weeks), and then sold it to investors
who got the money for the purchase (and sometiiues additional bonuses for themselves) by
borrowing from Empire Savings. Regulators banned Blain from the thrift industry, and in
April 1987 he settled a civil racketeering suit with the KSLIC for $100 million. The criminal
trial of Blain, Faulkner, and fi\e others began in early 1989 and was in progress as of this
writing. Reportedly the government had to hire a moving van to carry 4.000 documents to
court. Whether the jury would understand a case of such complexity remained to be seen.
Defendants faced a possible 1,696 years in prison if convicted.

Chapter 8. Tap-Dancing to Riches

1. Money that had been flowing out to money market funds began to go instead to
federally insured institutions. Thrifts with brokered deposits that exceeded 5 percent of their
total deposits went from 52 to 258 that year.

2. Organization of Petroleum Exporting Countries.

3. Ten years later Khashoggi would be ridiculed for his role as a middleman in the Iran-
Contia affair, and OPEC's reduced circumstances would make it increasingly difficult for him
to come up with the $250,000 a day it reportedly cost him to live.

4. Khashoggi was not often in Riyadh. He spent most of his time jetting around the world
in his Boeing 727 to close deals or visit one of his other seven estates (in London, Rome,
Paris, Cannes, New York, Beirut, and Jidda) where servants and lovely, expensive women
catered to his needs.

5. Air America was a charter airline that flew CIA flights in the Far East during the
Vietnam War.

6. The Kansas City Star confirmed with Azima and the U.S. State Department the
airline's business association with Egyptian American Transport and Services Corporation
(EATSCO). EATSCO was formed in 1979 by Thomas Clines, former CIA director of training
(and in 1986 a prominent figure in the Iran-Contra scandal), and Hussein Salem, a former
Egyptian government official and a friend of Azima. Other partners included Edwin Wilson,
former CIA operative found guilty of selling arms to Muammar Quaddafi in the late 1970s.
EATSCO had an exclusive contract with Egypt to ship billions of dollars of military equipment
to Egypt as part of the 1979 Camp David accords. For five years, half of Clobal International's
cargo business would be with EATSCO. (In 1983 Clines and Salem would plead guilty to
overcharging the U.S. government $8 million. Clobal International was not linked to any
wrongdoing. )

7. When we were investigating Mario Renda and Indian Springs State Bank in early

342 • Endnotes

1987. the Iran-Contra scandal was in full flower. Amerieans had just learned that Adnan
Khashoggi had played his familiar middleman role in raising $15 million for the complicated
arms transaction. The Iran-Contra affair exposed a shadow) covert crowd of which Global
certaiiilv had been a part. But Global International attracted \cr\ little attention during the
scandal because the airline had filed for bankruptcy in 1983 and slid from public view. After
bankrupting Global. Azima took the helm of another airline. R.'XCE Airways headquartered
in Madrid. In July 1986 a RACE jet reportedly carried 23 tons of arms to Iran, via Spain and
Yugoslavia, as part of the Iran-Contra deals, according to The Chronology by the National
Security Archives. When we tried to telephone Azima in 1988 we learned that he was then
chairman of Aviation Leasing Group, which had offices in Kansas City and London.

8. Shenker was licensed in 1975 to operate the Dunes.

9. The President's Commission on Organized Crime reported in 1986 that the leaders
of the Intcrnahonal Brotherhood of Teamsters, the nation's largest union, had been 'firmly
under the influence of organized crime since the 1950s." The report said Hoffa and Icamster
President Roy Williams (president from 1981 to 1983) were "indisputably direct instruments
of organized crime."

10. When Shenker filed bankruptcy in 1984 he listed debts of $197 million and he left
banks, savings and loans, and pension funds holding the bag for tens of millions in unpaid
loans. The IRS said he owed $66 million in taxes.

11. In 1987 former Teamster President Roy L. Williams testified during a federal rack-
eteering trial in Manhattan that he was controlled by Nick Civella. who was idenhfied in the
trial as the boss of the Mafia family in Kansas City.

12. Linked financing has been practiced for years by mob-dominated unions who could
offer union deposits (and kickbacks if necessary) to bankers in exchange for loans. Jonathan
Kwitny describes the practice in Vicious Circles, WW. Norton & Co.. 1979, as does Steven
Brill in The Teamsters. Simon and Schuster, 1978.

13. Individuals who posed as borrowers but who then turned the loan money over to
someone else.

14. Rcnda didnt bother to share with the banks and thrifts the little matter of the higher
interest rate he was quohng to his customers. He simply told the bank or thrift a block of
money was heading their way (via the Federal Reserve Bank lelecommunications System,
the Fed Wire), and he accepted whatever rate they were paying at the time. They, of course,
were delighted to receive these CD funds, and as an added incentive Renda waived the
traditional 1 to 2 percent brokerage commission normally paid by the institution. If the CD
owners noticed (and they often did not) that the banks were not paying them the rate Renda
had quoted them. Renda coughed up a check for the difference (from money generated by
the loan end of the scheme). Later, after First United Fund collapsed, regulators compiled a
partial list of 160 institutions that accepted deposits from Renda under these terms. By October

1988, 104 of them had failed.

15. The straw borrowers were also called "mortgage pullers."

16. Often the loans the bank agreed to make totalled half the amount placed on deposit
there by First United Fund.

17. Applications and references that the bank or thrift required from the straw borrowers
would be provided by Winkler or Daily. Often the references were Winkler or Daily.

Endnotes • 343

18. La Costu resort, in northern San Diego County, was the resort l)iiilt with up to $100
million in Teamster financing and rumored to be a hangout for organized crime since 197S
when Penthouse magazine did a major expose of the resort. La Costa general partner Edward
"Fast Eddie" Susalla appears in the chapter on Herman Beebe.

19. Indian Springs State Bank.

Chapter 9. Buying Deposits

1. Thanks to OPEC solidarity, oil prices went from $7.64 per barrel in 1975 to $34.50
in 1981.

2. Its failure almost toppled Continental Illinois National Bank and Trust Company in
Chicago, which held millions of dollars' worth of participations from Penn Square. Only a
$4. 5 billion federal bailout (of Continental's holding company. Continental Illinois Corpo-
ration) in 1984, the largest rescue in banking history, would prevent Continental's collapse.

?. Morris Shenker's bankruptcy in 1984 revealed that he had defaulted on a Penn Square
loan.

4. One FSLIC attorney told us Winkler introduced Ferrante to Renda. Winkler had an
office in Southern California.

5. Ultimately, however, most of the loans were made good when the borrowers realized
the heat was on the bank and the FBI would probably be the next to talk to them about their
tardy payments.

6. On December 8, 1983, Renda scribbled in his desk diary, "Winkler Sr. going to Kansas
City to talk to FBI re: conspiracy to kill Winkler and Lemaster." We could not tell if this was
a smoke screen they hoped would get the FBI off their scent or if Leslie Winkler had actual
knowledge of a conspiracy that resulted in the death of Lemaster and the shooting of Franklin.
Perhaps Franklin's father was simply trying to feed the FBI information that would isolate and
discredit Daily. The FBI wouldn't say, and no one was ever charged in either case.

7. Keep in mind, these amounts were in addition to his salary at First United and the
money flowing to him from straw borrowers he had in place around the country. He and
Schwimmer also were stuffing their secret bank accounts with $16 million garnered from their
business deal with the two union funds, a business deal they weren't telling the IRS about,
court records showed.

8. In 1989 the case was still pending.

9. Indian Springs State Bank had an asset value of $8 million when Lemaster took over.
Using brokered deposits, he increased the value of its assets to $43 million. When regulators
closed the institution, asset value had dropped to $28 million.

Chapter 10. Renda Meets the Lawyer from Kansas

1. The FDIC reported that of the 90 commercial banks that failed from 1982 through
March 23, 1984, 46 had brokered deposits.

2. By the end of 1 983 brokered deposits at FSLIC-insured institutions in the San Francisco
district were 11.7 percent of deposits; in the Dallas district, 7.5 percent.

3. The regulation said that as of March 26, 1984, brokered deposits would be limited to

344 • Endnotes

5 percent of assets by associations with less than ^ percent net worth. Then, beginning October
1, the KSLIC would insure only $100,000 per institution per broker.

4. Barnard was chairman of the Commerce, Consumer and Monetary Affairs subcom-
mittee of the House Government Operations Committee.

5. Published March 26, 1984, by the American Banker.

6. The report cited First United Fund's dealings with an unnamed thrift and an unnamed
savings bank.

7. When the Barnard committee later issued its report, in October 1984, it concluded
that there was no correlation between bank failures and brokered deposits and that there was
"neither concrete evidence nor a coherent logical argument that insured deposit brokerage is
inherently harmful to the banking system." The report did admit, however, that there were
instances where brokered deposits had been misused. Isaac later commented, "I think we were
maybe ahead of Congress in seeing this problem and trying to deal with it."

8. Gray's supporters alleged the leakers operated at Treasury Secretary Don Regan's behest.

9. Rumor had it that Rcnda leased the jet to a movie studio for actor Michael Douglas
to use in Wall Street, a movie about greed and corruption on Wall Street.

10. Renda used his brokered deposits for a variety of scams. He cheated the IRS, as in
the union deals with Schwimmer. Or he did linked financing deals a la Indian Springs. Or
he exaggerated the interest rate to his depositors to attract their deposits and keep his com-
missions coming. Or he skimmed from the proceeds in a variety of ways, as Beverly Haines
told us he did at Centennial. Investigators say they will never know all the scams Renda was
pulling.

11. Manning was hired by both the FDIC and FSLIC in a joint suit involving Indian
Springs State Bank and Coronado Savings and Loan.

12. What Manning did not yet know was that on the last day of his interrogation of the
Seven Dwarfs, Rexford State Bank in Rexford, Kansas, had failed, brought down entirely by
Renda and his special deals. It was the beginning of a cascade of failures regulators would
later lay at Renda 's door.

n. Frank Manzo, identified by the Jushce Department in court documents as an alleged
member of the Lucchese crime family (Manzo is a character in Nicholas Pileggi's book Wise
Guy), was talking to associate William Barone.

14. Bearer bonds bore no one's name and whoever held them could cash them in. Once
money was invested in the bonds it became virtually untraceable. Bearer bonds were so abused
by organized crime the government discontinued their use.

15. The Butcher brothers were convicted of bank fraud following the 1983 collapse of
their Tennessee and Kentucky banking empire. The Seven Dwarfs told Manning and Byrne
that Steve Black was Renda's connection to State Savings in Clovis, New Mexico, among
other S&Ls, and his deals were referred to around First United Fund as "Black Magic Deals. "
Black was never charged with any wrongdoing.

16. TTic Houston Post revealed that Adnan Khashoggi and Howard Pulver, who had been
Martin Schwimmer's neighbor in an exclusive Long Island community for II years (Houston
Post reporters discovered the neighborly arrangement quite by accident when they went to
Pulver's Long Island home to try to interview him and then later went to Schwimmer's home

Endnotes • 345

for the same purpose. When asked, Scliwimmcr and Pulvcr did not admit that they knew
each other), had done millions of dollars worth of business with Mainland. When the S&L
collapsed in April 1986, with assets of $800 million, it was at that time the largest S&L failure
in I'.S. banking historv'.

17. In 198^ First United Kund had described itself in a brochure as "the smgle largest
purchaser of certificates of deposit in the United States."

19. In 1988 the FDIC compiled a partial list of 104 thrifts and banks that received brokered
deposits from First United Fund and later failed.

18. The suit asked $20 million in actual damages but charged the defendants under the
Racketeering Influence and Corrupt Organizations Act. RICO, which tripled the damage
award.

2U. It was scheduled to go to trial in 1989. Ironically, the first attorney Renda called, in
his search for a lawyer to represent him. was Manning. Renda did not know then that Manning
had already been hired by the FDIC to work on the Indian Springs State Bank case.

Chapter 11. The End of the Line

1. In September 1987 Franklin Winkler would be found living quietly in Australia and
Leslie would be located in Israel. The government started extradition procedures. They dragged

'on and on. Leslie died in Israel in November 1988. As of this writing, Franklin was still in
Australia.

2. FSLIC attorneys said he moved the money to Brazil and Switzerland.

?. Renda promised the Kansas City prosecutor that he would cooperate in bank fraud
(investigations in Louisiana and Texas, but a Louisiana attorney who questioned him later told
us Renda was evasive, at best.

, 4. The U.S. attorney obtained pleas of guilty from many of the little straw borrowers
'who had made up Daily's and Winkler's army of "investors. " Most received suspended sentences
land were ordered to repay the loans.

5. Renda testified in Schwimmer's trial, and Schwimmer was convicted in 1988. During
(the trial Schwimmer's attorney asked Renda. "But in the past you've never hesitated to lie
when you could make money off of it. have you?" and Renda replied. "That's correct, Mr.
Fink. " (From a transcript of the trial.)

!

'Chapter 12. "Miguel"

1. The $50 billion figure, compiled for the President's Commission on Organized Crime
n the mid-1980s, included income from tradihonal mob enterprises such as narcotics, loan-
harking, prostitution, and gambling. It did not include billions in income from the mob's
legitimate " businesses.

2. Wharton Econometric Forecasting Associates estimated that average Mafia members
nade $222,000 a year between 1979 and 1981.

; 3. "Wise guy" was a term used by the mob to describe those at the lowest echelons of
jhe mob organization who carried out the day-to-day chores, assignments, and scams. It was
m entry-level position in the family and the manpower pool from which the mob selected its
:Jture soldiers, lieutenants, and capos. In the old days a wise guy might strong-arm someone

346 ■ Endnotes

who was late on his payments to the mob Today's wise guy might just as well be a teller, an
accountant, or a real estate broker, organizing financial scams for himself and the family.

4. A sit-down is a meeting held by mob hierarchy, sometimes made up of various mob
families for extraordinarily important discussions. They can be held to resolve territorial disputes
between mob families or to plan major mob operations.

5. Federal investigators claimed that Sid Shah and Norman B. )cnson used some of these
techniques to launder money through real estate projects that were ultimately cashed out by
Centennial Savings. (Centennial bought them. Thus, Shah and Jenson received clean Cen-
tennial money in place of the allegedly dirty money they spent on the projects. )

6. For example, consider a quit claim deed: that instrument's legitimate purpose was to
allow someone to deed to someone else whatever interest he might have in a property . It was
used most often to clear a title. By signing a quit claim deed a person pronounced that whatever
interest he had in the property was thereby renounced or transferred, even if it were no interest
at all. In a money-laundering operation a quit claim deed was a diversion. An investigator
seeing that Joe quit-claimed his interest in a given property to Dick could spend weeks back-
tracking to find out where Joe got his interest in the property in the first place. Using several
dozen such quit claim deeds in a money-laundering operation could tie up investigators for
months as they checked out each and every deed. It only took five minutes to file a quit claim
deed, and filing a phony one was not illegal.

7. Proceeds from drug trafficking, prostitution, and illegal gambling, primarily.

8. Also brokerage houses, currency exchange businesses, and, added in 1985, casinos.

9. Nevertheless, the federal government successfully prosecuted several well-publicized
cases of money laundering through financial institutions. One of the most notable was Op-
eration Greenback in Florida, which led to 211 indictments, 6^ convictions, $38.5 million
in dirty money seized, and $117 million in fines to financial institutions.

10. Russian for reorganization.

11. Sit-downs, at which such operations might have been discussed in the past, had
become a target of justice Department electronic surveillance probes and landed more than
one godfather in jail.

12. Joseph Pistone, testifying before the Senate subcommittee on investigations in 1988.

n. ThedetailsofHellerman's early life, up to 1977. come from his authorized biography.
Wall Street Swindler, Thomas C. Renner, Doubleday & Co., 1977.

14. His father was a certified public accountant who worked for Chemical Bank of New
York and eventually became a bank vice president.

15. Roselli was also the CIA's contact with the Mafia in the intelligence agency's inef-
fectual schemes to kill Castro.

16. From The Last Mafioso, by Ovid DeMaris, Bantam Books, 1981.

17. Hellerman would later dedicate Wall Street Swindler to Morvillo, among others.

18. Rapp and Rizzo's relationships with others in this chapter were as described in swoni
depositions given by Anthony Delvecchio and Ronald Martorelli.

19. A U.S. attorney said that Jilly's Enterprises was a private company organized by Jillv
Rizzo, Anthony Delvecchio, and another for the purpose of developing the Poconos properly.

Endnotes ■ 347

At the time there was talk of bringing legalized gambling into the Poconos, but it never
materialized. In 1983 World Wide Ventures acquired 5(1 percent of jilly's Knterprises and the
right to develop the Poconos property. The property would later .surface in at least two other
troubled institutions, Aurora Bank in Denver and Acadia Savings and Loan in Crowley,
Louisiana. See chapters on Herman Beebe.

20. Hiring appraisers to provide inflated appraisals was a common way that borrowers
and thrift officials justified large loans.

21. Delvecchio said in a 1985 deposition that World Wide had at one hme been called
World Wide Ventures/)illy's Enterprises Inc. Lorenzo Formato, who served as World Wide's
president, was a former stockbroker. Regulators later revealed that in 1982 the Securities and
Exchange Commission had banned Formato from any association with any broker or dealer
for two years for violating various provisions of federal securities law.

22. According to a November 1986 civil lawsuit filed by the FDIC against John Antonio,
Angelo Carnemolla, Fuad C. )ezzcny. William ). V'andcn Eynden. Jilly Rizzo, Anthony
Delvecchio, and others, Rizzo and Delvecchio secured the loans from Aurora in July 1984
using 500,000 restricted shares of World Wide Ventures Corporation as collateral, "which
stock in fact had little or no actual value as collateral for the loans." Aurora Bank failed in
November 1985. Two other Colorado banks lost hundreds of thousands of dollars after be-
coming involved in the scheme and both later failed. Napoli, a former president of Aurora
Bank, Heinrich Rupp. and two others were convicted of bank fraud in connection with the
Aurora Bank failure. Court documents in the ease read like a dime novel, with tales of money
laundering, gold bars, and a robbery of $475,000 cash. Napoli was also charged in an unrelated
case with dealing in narcotics. In the Aurora case Napoli copped a plea and was sentenced to
nine years in prison, but his sentence was suspended and he was put on five years' probation.
Rupp, who could have gotten 42 years, got two. After the judge handed down the sentence
on February 24, 1989, a government attorney remarked, "He'll be out this summer, you
watch."

2?. He testified, "In many cases, I think the people involved — of the ones I knew of —
they were a very specialized group of people. They — they played on two, I think, very significant
factors: One was a certain amount of patriotism that the banker would demonstrate by going
along with whatever the current scheme was — and there were a number of schemes used. . . .
And secondly, that the banker himself — the banker would enrich himself by doing so; and he
would do so at the expense of the insurance company, not at the expense of the depositors.
In some cases that, of course, didn't work; but in many cases it did."

24. We were unable to verify this story, and the witness was later indicted for perjury
(case pending) for other statements he made about this case. But Rupp's attorney told us he
believed the reason the judge in early 1989 reduced Rupp's sentence from 42 years to two
years was because he believed the CIA story.

Chapter 13. Flushing Gets a Bum Rapp

1. According to a September 16, 1985. deposition given by Ronald J. Martorelli.

2. According to an August 1, 1986, deposition given by Anthony Delvecchio. Also,
according to testimony given by Anthony Delvecchio in 1986, Rapp was filtering loan money
he'd obtained from Flushing to his wife through a company he'd set up called Any Name,
Inc.

348 • Endnotes

3. The interest rates charged on the Rapp group loans were not exactly tough. Rapp and
his cohorts were paying only the prime rate plus one percentage point on the lines of credit
Rapp had obtained from Flushing. Most commercial bank customers paid at least prime plus
2 (for valued customers) or prime plus ?. Brazil or Argentina would kill for such a deal.

4. Later the Federal Reserve Board denied the application.

5. According to depositions given by Ronald J. Martorelli, September 14 through Sep-
tember 17, 1985.

6. The Federal Reserve Board ultimately turned down the application.

7. September 1985 deposition given by Anthony Delvecchio.

8. Rapp was quite familiar with the Regency In Wall Street Swindler he wrote that back
in the late 1960s he'd attended a number of mob sit-downs there and in 1971 it was at the
Regency that Rapp wore a concealed microphone in the investigation that led to the indictment
(and conviction) of Robert Carson, the administrative aide to Hawaiian Senator Fong.

9. American Banker, March 31, 1986.

10. Investigators later speculated that Renda's sloppy handling of this seam illustrated just
how desperate he was for money at the time.

11. Florida Center Bank collapsed in April 1986, less than seven months after Rapp's
deal began to unfold.

12. When Bazarian put his company, CB Financial, into bankruptcy, among those listed
who owed him money was The Muhammad Ali Fan Club, which owed him $62,000.

n. But was it their plan? In his book The Last Md/ioso, )immy Fratianno told of a
conversation he had with Teamster executive Allen Dorfman m the 1970s when Dorfman
faced trial for a pension-fund scam he had pulled in New Mexico. Dorfman reminded Jimmy
of another case where a boxer helped out. Fratianno described his conversation with Dorfman:
"So Allen brings up the time )oe Louis walked into the courtroom in Washington when Hoffa
was on trial for bribery and shakes hands with Hoffa. All the blacks on the jury, and there
must have been eight or nine of them, see this and they acquit the sonovabitch in about two
hours flat. So Allen's thinking how great it would be if Muhammad Ali walked into the
courtroom and shook his hand " That never happened. Dorfman was convicted and then
assassinated while his case was on appeal.

14. William Smith, the alleged former CIA agent, was also convicted of conspiracy and
bank fraud in the Florida Center caper.

1 5. In August 1986 Rapp pleaded guilty for running a check-kiting scheme that defrauded
Flagship National Bank of Miami. The institution's name was later changed to Sun Bank.

16. Farrell and Wolk were former business partners of John A. Zaccaro, the husband of
1984 Democratic vice presidential candidate Gcraldine A. Ferraro, in an unrelated business
deal. Zaccaro was not implicated in the indictment.

Chapter 14. Casino Federal

1 . The Teamsters Central States Pension Fund, for example.

2. Junk bonds marketed by the securities firm Drcxcl Burnham Lambert were a favorite.

Endnotes • 349

3. A series of articles in the Las Vegas Review-Journal revealed that entertainer Wayne
Newton was an original investor in the Shenandoah when it opened in 198(1 hut tough state
gaming officials would not approve a casino license for the owners. Newton had an ahidiug
interest in owning a hotel-casino. After he backed out of the Shenandoah deal, he tried
unsuccessfully to purchase the Aladdin, Stardust, and Fremont in Las Vegas, according to
published reports. He also invested in the Poconos in Pennsylvania when he believed voters
would approve gambling in the state.

4. The DeVille was in Las Vegas, the Crystal Palace in Laughlin.

5. A Reno businessman told us an associate of L,apaglia's boasted that Lapaglia had
brokered loans in connection with at least four casinos. Lapaglia told us he had brokered only
one.

6. Lapaglia claimed he never personally earned more than $2 million in his entire life.

7. And Eureka Federal Savings and Loan, San Carlos, California.

8. Alliance was one of the thrifts that Renda and Sehwimmer used for their pension fund
scam.

9. Irving Savings near Dallas had first agreed to make the loan, but regulators forced
them to back out. An associated thrift. Home Savings in Seattle, then agreed to assume the
loan in one year (Home was run by John Shepard, who had taught a seminar at Lapaglia's
company for a short time before going on to run Home Savings), so Lapaglia went to Olano
for interim financing.

10. Alliance was under a strict court order not to make such loans without FHLBB
approval, regulators later charged.

I

j 11. Officials from three federal agencies also gave details to a New Orleans judge of at

' least six other investigations involving Olano, including allegations of ties with organized crime

and cocaine trafficking, according to published reports.

12. Later officials would allege in bankruptcy court that some of the collateral (machinery
and scrap steel from his demolition jobs, for example) may not have existed.

n. Until he was removed by regulators later in 1984.

14. Players Casino, the Dunes, Maxims, and the Treasury. A renovation loan for the
Treasury came from Ed Forde's San Marino Savings in Southern California.

15. The gaming investigators even looked to the source of funds being used by the applicant
to buy the casino. If they didn't like where the money had been, they turned down the
applicant. One year after making Schwab his Players loan. Eureka Federal was declared an
unfit source of funds for casino purchases. The gaming control board never publicly explained
why.

16. Schwab also bought controlling interest in the Rushville National Bank in Rushville,
Indiana, The bank's attorney was former U.S. Senator Vance Hartke. When Paul called him
in May 1987 to ask him about Schwab, Hartke replied, "I've met him. But I've never been
in business or represented him."

17. The FHLBB approved a regulation that established a formula for raising the minimum
net-worth requirements for a thrift. The purpose of the regulation was to elimmate the excessive
leveraging that was contributing to fast growth and careless lending.

350 • Endnotes

18. Letter to the chairman of Freedom Savings from Schwab.

19. The Philadelphia project was an old distiller.' that the EP.A in 1987 placed in their
Superfund cleanup program, estimating the cleanup might cost $1(1 million Schwab would
not be on the hook for the cleanup costs, however, because Freedom Savings had foreclosed
on his loan, and the KSLIC had closed Freedom Savmgs. so the FSLIC was the proud new
owner of and therefore responsible for, the toxic site.

20. The Daily Oklahoman reported that Bazarian brought Kohnen into CB Financial
after having dealt with him when Kohnen was in the Washington, D.C., office of the Robert
Strauss law firm. (Strauss was chairman of the Democratic National Committee 1972-76.)
Strauss told us an associate in the law firm confirmed that Kohnen did work there, but Strauss
said he had never met him.

21. Court documents revealed that in late 1985, after Bazarian had bought into Freedom
Savings, attorney Eric Bronk's firm represented Consolidated Savings and Loan on several
trips to Tampa to convince Freedom Savings to purchase some of Consolidated's troubled loan
portfolio. In 1988 First Federal Savings and Loan of Shawnee. Oklahoma — one of four failed
Oklahoma thrifts to whom Bazarian owed millions — would sue Bazarian and Freedom Savings
and others, charging they participated in a racketeering scheme headed by Bazarian to defraud
the thrift. Freedom Savings denied the charge. The case was pending at press time.

22. Schwab had conducted a 20-year battle with the IRS. He freely admitted to Gaming
Control Board agents that he formed companies to hide his homes from the IRS. And he
admitted that every year he filed incomplete tax returns, on purpose. He claimed $200,000
in commissions every year, saying that he owed no taxes but would file an amended return
soon.

23. In the Abscam sting in 1980, FBI agents posed as bribe-offering sheiks to obtain
criminal evidence against members of Congress and others.

24. Donald P. Crivellone was president of First American Bank and Trust. We had mn
into Crivellone at Consolidated Savings, where he was a director from May 1984 to March
1985. He was not charged with wrongdoing at either institution.

25. When Anderson took over the Dunes Hotel one of his first moves was to hire the
former chairman of the Gaming Control Commission to work for him at the Dunes. \
regulation was later established to prevent such moves.

26. His partner at First National Bank of Marin was E. Morton Hopkins, a Texan who
later owned Commodore Savings and Loan in Dallas, which failed. Hopkins was indicted in
January 1989 for election fraud, for allegedly hiding from regulators the use of Commodore
funds for political purposes.

27. Mario Renda brokered $550.4 million in deposits into San Marino. A key loan officer
at San Marino during the tune Bona and Domingues received some of their loans later became
CEO at South Bay (owned by Bona and Domingues) and a consultant to Robert Ferrante's
Consolidated Savings.

28. FHLBB memo of 9-28-83 and documents on file with the California savings and
loan commissioner.

29. At that time the largest liquidation of a thrift in FSLIC history.

30. The Dallas Morning News reported that Robert Ferrante of Consolidated Savings
borrowed $3. 1 million from South Bay. Regulators removed Domingues from the helm at

Endnotes ■ 351

Soutli Bay in November 1984, 18 months after tlic thrift opened. South Bay was seized by
regulators in Mareh 1987.

M. Who listed his name on an Atlantic City gaming license application as )ack Bonacorte,
according to the Dallas Morning News.

32. Bank records show Domingues arranged $2 million in loans from Vernon Savings
in Dallas to buy out Bona. Domingues also borrowed between $10 million and $14 million
from Eureka Federal Sa\ings for Texas real estate projects, according to an FSLIC attorney.

33. Cost of completing the project was estimated at $287 million in a 1986 prospectus.

34. The KBI didn't know how much money the pair put into the project. They questioned
us on the subject when we tried to pr> information from them about the Palace Casino.

35. Another buddy of Michael Rapp. |ohn Diognardi (Johnny Dio), was reportedly a
close friend of Paul "Red" Dorfman, father of Allen Dorfman, who became the power behind
the fund after Hoffa went to prison. Allen Dorfman was a "special consultant" to the fund
and was later convicted of racketeering and then shot to death in a Chicago parking lot in
1983.

36. Later, in a court settlement, it did get $8. 5 million from the !• HLB in Topeka, which
supervises thrifts in Oklahoma.

37. One of the thrifts that bought the Drexel Burnham junk bonds was Southniark's San
Jacinto Savings and Loan. See chapter 20.

Chapter 1 5. Gray, Stockman, and the Red Baron

1. San Marino was put in the hands of a conservatorship in February 1984 and closed
permanently in December 1984.

2. Seven times more than State Savings was allowed to invest in a single project.

3. State/Salt Lake City failed in April 198S — at the time the largest failure in the history
of the FSLIC in terms of deposits ($416 million). We ran into Oldenburg when he was
brokering loans into F.urcka Federal Savings in San Mateo, California. He once owned the
defunct Los Angeles Express football team. The FSLIC sued Oldenburg and others for $50
million, alleging fraud and self-dealing. Then, in February 1989, with less than three days
left to run on the statute of limitations, Oldenburg was indicted by the San Francisco United
States attorney. He was accused of grossly inflating the value of land so he and others could
sell it to State Savings at an enormous profit. Oldenburg angrily denied the charge and hired
former San Francisco Mayor Joseph Alioto to defend him. Alioto claimed the government
had waited until the last minute to indict Oldenburg in order to take full advantage of the
growing public "lynch mob mentality " over bank fraud cases. Both civil and criminal cases
against Oldenburg were pending when this book went to press.

4. Not all go-go S&Ls relied on brokered deposits. Some, like American of Stockton,
established their own deposit solicitation department, often called a money desk.

5. In the industry such properties were called REOs, short for "real estate owned." REO
was a benign-sounding pseudonym for real estate that the thrift had to repossess because the
borrower defaulted on his loan.

6. Was it coincidence, then, that American — owned by FCA — agreed to purchase a
package of loans from San Marino Savings that included $100 million of Bona and Domingues

352 • Endnotes

loans (on which regulators later claimed American lost $17 million)? Or was it all part of one
large quid pro quo, as one investigator told us he suspected? Odds arc. we will never know.

7. BusinessWeek reported that in 1989 Pelullo again went to Knapp (then doing business
as Trafalgar Holdings Ltd. with former California Savings and Loan Commi,ssioner Larry
Taggart) to finance an unsuccessful takeover bid for DWG Corporation controlled by corporate
raider Victor Posiier. (For eight months in 1987 and 1988, according to BusinessWeek. Pelullo
had earned $1.2 million as a consultant for Posner.) A profile of Victor Posner in The Wall
Street Journal said the SEC had charged Posner and others with a series of securities-law
violations in 1977 (Posner agreed to an injunction related to the charges without denying or
admitting guilt) and in 1987 he was convicted m Miami of tax evasion (the verdict was later
thrown out and a new trial was pending). The Wall Street journal said Posner was obsessed
with security and was almost always accompanied by bodyguards. BusinessWeek reported that
in 1987 Posner earned $8.4 million in salary and bonuses from DWG. In 1988 he was sued
by the SEC, on charges of illegal stock trading in 1984, as part of the SEC's massive case
against Drexcl Burnham Lambert, built largely from information provided by Wall Street
trader Ivan Boesky.

8. David Stockman was director of the Office of Management and Budget from 1981 to
1985.

9. Popejoy had operated thrifts in California and he had headed up the P'ederal Home
Loan Mortgage Corporation, a quasi-governmental agency that bought mortgages from thrifts.

10. Garn-St Germain allowed thrifts to invest more of their deposits in direct investments,
as opposed to simply making loans on projects. Centennial Savings, for example, invested in
Sid Shah's mushroom farm project. Gray did not believe such investments were a prudent
way for thrifts to use federally insured deposit money, and he was proposing strict new limits
on what percent of a thrift's assets could be m direct investments. The difference between a
direct investment and a loan was primarily that in a direct investment the thrift provided 100
percent of the financing, participated in the losses, and had no recourse to the borrower's other
assets if the borrower defaulted on the loan. Thrifts confused the hvo, often on purpose,
because they wanted to collect the points, fees, and interest that characterized a loan and they
also wanted to participate in any profit from the appreciation of equity. Regulators didn't
establish clear distinctions between the two until 1985.

11. Regan was Secretary of the Treasury from 1981 to 1985.

12. The Bank Board resolved the FCA problem by selling .American Savings to the Bass
Group in 1988. The resolution cost the FSLIC over $2 billion.

n. By the end of 1984 more than one-third of the states had given their thrifts investment
powers beyond those of federally chartered institutions. California, for example, had no limit
whatsoever on direct investments in real estate, and Texas limited real estate investments only
to 100 percent of the S&'L's net worth (unless the state commissioner approved the investment).

14. Failure rates for S&Ls relying heavily on direct investments were high. For example,
the FHLBB staff identified 37 institutions with direct investments exceeding 10 percent of
their assets in late 1985. Three years later 21 of those institutions had failed or were ni serious
trouble.

15. Growth was measured by the size of an institution's assets (loans and investments),
not by the size of its liabilities (deposits).

16. Or twice its net worth, whichever was greater.

Endnotes ■ 353

17. Or twice its net worth, whichever was greater.

18. The regulation required additional net worth for institutions growing more than 15
percent per year.

19. Texas thrift assets: 1980. $?5.? billion; 1981, $?8.2 billion; 1982, $43.5 billion; 1983,
$57.3 billion; 1984, $78.4 billion; 1985. $94.5 billion; 1986. $97.3 billion; 1987. $100.1
billion. Source: "Where Deregulation Went Wrong" by Norman Strunk and Fred Case,
published in 1988 by the U.S. League of Savings Institutions.

20. Art collections became a favorite investment for deregulated savings and loans.
CenTru,st Savings of Miami, for example, had a $28 nnllion art collection in 1988 when
regulators announced they had ordered CcnTrust to sell the collection, much of which they
discovered was kept at the thrift chairman's home.

Chapter 16. Going Home

1. Later Dixon reorganized, making Dondi a subsidiary of Vernon.

2. Vernon also loaned over $15 million to borrowers who wanted to purchase Sandia
stock (one of the buyers was Tom Gaubert. who was the power behind Independent American
Savings Association in Dallas), and Sandia Savings bought over $80 million in participations
from Vernon.

3. The shopping center loan later went into default.

4. The High Spirits was non-partisan. Democrat Tom Gaubert of Independent American
Savings told BusinessWeek he remembered being asked to leave the yacht because Republican
Ed Mecse was coming aboard.

5. The Dallas Morning News reported that Ferrante and a partner borrowed $8 million
from Vernon to buy real estate from Dixon's Dondi Group, Inc.

6. Barker and Vineyard bought the thrifts in a deal that involved Texas banker Sam
Spikes. Barker, Vineyard and Spikes would later be convicted for the loans they made to one
another to facilitate their mutual bank acquisitions.

7. In a cash-for-trash transaction, a thrift officer said, in effect, "We'll make you the loan
you want, on the condition that you use the extra money we loan you to buy a piece of
repossessed real estate we have on our books." Cash-for-trash schemes were popular among
poorly run and crooked savings and loans because as long as the thrift could keep reselling
repossessed properties to phony buyers (thereby hiding their past mistakes), and collect phony
fees and make a phony profit, it could hold off suspicious federal auditors. Of course the trash
prof)erty usually went back into default within a year or two, since the borrower really had no
interest in it. But that wasn't necessarily bad news for the thrift, which could then recycle the
property to another cash-for-trash customer.

8. Eureka Federal, under chairman Kenneth Kidwell, made the loan (brokered by John
Lapaglia) to Philip Schwab to renovate the Players Casino and gave )ohn Anderson the $25
million letter of credit to fund his purchase of the Dunes Hotel and Casino in Las Vegas.
Nevis was a business associate of California farmer John Anderson, who, federal investigators
said, also borrowed heavily from State/Corvallis after being introduced to the thrift by loan
broker Al Yarbrow. Among other things. Nevis and Anderson were both tomato farmers in
the Sacramento Valley.

354 • Endnotes

9. When a mysterious fire destroyed Ne\is Industries' corporate jet. Barker loaned Nevis
one of State/Lubbock's, ostensibly because Nevis had become such a valuable customer. V\hen
federal regulators seized State/Lubboek, they would have to go to court to get Nc\is to give
the plane back. Nevis claimed Barker had given it to him.

10. Empire was located in Mcsquite. near Dallas.

Chapter 1 7. Dark in the Heart of Texas

1. Published accounts showed that a Connally/Barnes partnership borrowed S40 million
from Vernon. Connally was Secretary of the Navy 1961-62. wounded m the Kennedy assas-
sination in 1965, governor of Texas 1963-68, Secretary of the Treasury 1971-72. and candidate
for the Republican presidential nomination in 1980.

2. Yarbrow and Franks were the two Southern California loan brokers who the justice
Department alleged were in\olved in deals with Tom Ne\is at State/Conallis. Yarbrow intro-
duced Charles Bazarian to Consolidated Savings (who then connected Bazarian to Mario
Renda), according to Consolidated's chairman, Ottavio Angotti, and Yarbrow reportedly took
Anderson to both Bazarian and Vernon Savings.

?. When we checked Bazarian's bankruptcy papers we found that he and/or his companv,
CB Financial, had listed Vernon as a creditor, delineating over $1 1 million in unpaid loans,
including $118,000 on a 1985 Rolls-Royce and S15.000 on a Mazda.

4. WFAA-TV, Dallas, news reporter Byron Harris, in an on-camera interview.

5. Hill also pleaded guiltv to making an illegal $2,000 campaign contribution, with
Vernon's money, to Representative Jack Kemp and others. In 1988 Kemp was appointed
Secretary of Housing and Urban Development for the Bush administration.

6. Two years later, after Dixon filed for bankruptcy, the trip made the newspapers and
caused the Catholic Church some embarrassment. Maher and Eagen denied knowing the trip
was at X'emon's expense. They pointed out that the Dixons had other guests and that they,
Maher and Eagen, returned to San Diego on a commercial jet, leaving the Dixons behind to
continue their European holiday. Maher told the San Diego Union he accepted the trip as a
matter of convenience because he had business in Rome and Dublin. Then he stopped
discussing the trip with the press at all.

7. To drum up foreign investment in Vernon.

8. Regulators later claimed the thrift received no benefit from the trips whatsoever.

9. When a borrower couldn't qualify for a loan he could pay someone with a strong
financial statement to join him as a partner in the project. Once the loan was made the
borrower would buy out his partner with a portion of the loan proceeds. The buyout was
actually the partner's fee for "kissing the paper "

10. Texas Business magazine reported that Bowman had owned thrift stock that he sold
at a considerable profit to Ed McBirney. The Wall Street journal revealed he also was a partner
in a real estate venture with Patrick G. King, a friend who was chairman of Vernon Savings
and has been accused by the feds of having looted the institution. Both activities occurred
after Bowman became the commissioner, but state officials have said Bowman's actions did
not constitute a conflict of interest. Bowman resigned as Texas S&L commissioner in 1987.
He did try to get authority for state regulators to seize an S&L without having to go to court
first. He drafted a bill that passed only after he reached a private agreement with an S&L

Endnotes ■ 355

owner who thought the bill was aimed at him Bowman later told BusinessWeek. "I had to
negotiate with people 1 didn't want to be in the same room with."

1 1 . The meeting was called by Continental Savings President David Wylie and Chairman
Carroll Kcllv. the Post reported. Regulators told the Post that information about the meeting
had been turned over to the justice Department "as part of an ongoing criminal investigation. "

12. Sam Spikes helped them buy Key Savings and Loan near Denver in return for loans
from Key. Barker and Vineyard were later found guilty and sentenced to five years in prison.
Barker cooperated with federal investigators in their investigation of Tom Nevis and )ack Franks.

n. Including Charles Keating, )r . of Lincoln Savings.

14. The day Cray removed Knapp from KCA, Gray had tried to coordinate the move
with Taggart in California, only to discover Taggart had gone hiking in the Sierras and could
not be reached.

15. In January 1989 the House Banking Committee grilled Taggart about his letter.
Taggart replied that none of his actions as a regulator were ever politically motivated and his
reference to campaign contributions in the letter was only an effort to "get Don Regan's
attention." Congressman Jim Leach (R-lowa) denounced Taggart during the hearing: "You
are part and parcel of a group who turned thrifts in this state [California] into private piggy
banks for speculators and developers. . . . Your testimony proves my contention that the thrift
crisis was caused by cooked books with regulators acting as chefs and legislators stirring the
pot."

16. BusinessWeek reported October 31, 1988, that Wright got $240,000 (20 percent of
his total) for his 1986 campaign from savings and loan and real estate interests.

17. Everyone knew that House Speaker Tip O'Neill planned to retire in the near future
and Jim Wright would be tapped to become speaker of the House, the third most powerful
position in the government. Wright became speaker in January 1987.

18. Regulators had declared Westwood Savings in.solvent in March 1986, claiming the
thrift's problems stemmed mainly from its participahon in land flips. They said Westwood
bought property from real estate syndicators (one of whom, they alleged, was Hall, who made
a healthy commission on each sale) and then simultaneously, or nearly simultaneously, resold
the property to affiliates of the syndicators at a substantial profit (with Westwood providing the
loans for that final transfer). When the borrowers defaulted on the loans Westwood was left
with the properties, which were not worth the amount of the loans, regulators said.

19. It would be August 1987 before a compromise recap bill would finally pass both
houses of Congress and be signed into law.

20. The Wall Street ]oumal reported that Mann donated $2,000 to Wright's 1985 re-
election campaign.

21. Losing brokered deposits to invest in commercial real estate development. Independent
American grew from $40 million in assets in 1983 to $1.8 billion by the summer of 1986.
Gaubert got control of Independent American in October 1982.

22. Over a 15-month period ending in September 1986, Dixon and people with ties to
Vernon donated about $60,000 to the Democratic Congressional Campaign Committee. Hall
and others with ties to his company donated $4,700, according to the Chicago Tribune.

356 ■ Endnotes

2?. Regulators' management of assets that they acquired from insohent thrifts would
make an interesting topic for another book. Their record was dismal.

24. Gray decided that the only way Wright would be satisfied that the FHLBB's handling
of Gaubert had been fair would be if Cray appointed an independent counsel acceptable to
Gaubert to conduct an investigation. Regulators later characterized the appointment as "ex-
tremely unusual, even extraordinary. " The independent counsel ultimately upheld the Bank
Board's decision, discovering that, though there had been some procedural errors committed
by the Bank Board at Independent American, the outcome of the examination would have
been the same even if the errors had not occurred.

25. Ironically, the last thrift closed by the FSLIC prior to the passage of the recap was
Capitol Savings in Mount Pleasant. Iowa. When regulators got control of Capitol and dug
into its books, they found a deal they didn't like and made a criminal referral to the Justice
Department on Tom Gaubert. Later a grand jury indicted him for loan fraud. He told us he
had simply been doing the thrift a favor, and he believed the indictment was an attempt by
the Reagan administration to embarrass Representative VV right. The Justice Department said
Gaubert made at least $5.6 million off of a 198? land flip. A Bank Board official told a
congressional investigator, ". . . our own enforcement people had . . . documented a pattern
of land flips and fraud. . . . None of this had been proved in a court of law, but it is as solid
a finding as you were going to find. " Gaubert was acquitted in October 1988.

26. Selby was asked to leave the Dallas FHLB after Wall took over the FHLBB chair-
manship from Gray in 1987. In an interview Selby hinted that some of the thrift owners he
forced out had friends in Congress and he had become "a political liability" for the FHLBB
in Washington.

27. Selby refused to name the man, saying he had assured him confidentiality.

Chapter 18. The Last Squeezing of the Grapes

1. Dixon associates said m depositions later that Dixon's California attorney told them
Paris Savings was Dixon's "junk S&L," meaning presumably that Dixon could place his bad
loans with them. A director of Paris Savings was Harvey McLean, whom regulators believed
was an associate of Herman Beebe, according to a report by the comptroller of the currency.

2. A later appraisal commissioned by regulators put the artworks' real value at onlv
$44^,000.

3. Franks pleaded guilty to a charge that he helped defraud Vernon Savings, and he
cooperated with authorities.

4. Vernon's directors had to agree to the consent-to-merger agreement, which they did
December 31, 1986.

5. The following account of the Wright telephone call on behalf of Don Dixon and
Vernon Savings is as recounted by the report of the special counsel investigating Jim Wright.
Richard J. Phelan, for the House Committee on Standards of Official Conduct, February 21,
1989. When Dixon appeared before the committee, he asserted his fifth amendment right
against self-incrimination and refused to testify.

6. In May 1989 the Washington Post revealed that in 1973. when he was 19, Mack
brutally attacked a young woman, a stranger. He pounded her skull with a hammer, stabbed
her five times near the heart, slashed her repeatedly across the throat, drove around for a «hile

Endnotes ■ 357

with her unconscious body in the car. then parked tlie ear and went to the movies. Incredibly,
the woman hved. Mack pleaded guilty to malicious wounding and was sentenced to 1 S years
in the Virginia State Penitentiary, but in what the Pos( said a state attorney called "highly
unusual" treatment, he never served tune in the pemtentiary. Instead he did 27 months in
the county jail and was paroled to a job as staff assistant to Wright, who even before sentencing
had had the judge notified several times that Mack had a good job waiting for him. Mack's
brother was married to Wright's daughter. By 1989 Mack was earning $90,000 as perhaps the
most powerful staff member on Capitol Hill, and the Post reported that his histon' was known
to many on Capitol Hill. Responding to comments that the victim never received restitution
or even an apology from Mack. Tony Coelho. who described himself as "very close " to Mack,
said, "Rightly or wrongly, under our system of law )ohn Mack owed his debt to society, not
, to this young woman." If Wright were to let Mack go, Coelho told the Post, "members would
be lined up to hire him." Mack was a model of rehabilitation, his supporters said. Journalist
Brooks )acbon reported that in 1981 Coelho wrote to a judge on behalf of another convicted
murderer (who bludgeoned, stabbed, choked, and buried alive his victim) whose father had
contributed to Coelho's campaign. The judge was unmoved by Coelho 's plea. The Phelan
report said that Wright in 1975 wrote a letter requesting leniency for another convicted felon,
William Carlos Moore. The Justice Department accused Moore, a Teamster lobbyist for eight
years, of misappropriating Teamster funds for his own use. Moore said Krank Fit/.simmons.
Teamster president, and Jimmy Hoffa, former Teamster president, were aware of the diversion
and the money was used to luake cash contributions to politicians. Moore eventually pleaded
guilty to one count of income tax evasion, and Wright wrote the judge on Moore's behalf,
saying he'd been a personal friend of Moore's for more than 20 years. Moore was sentenced
to two years in the penitentiary (he served 4Vi months). In 1984 Moore published Wright's
Reflections of a Public Man which became one focus of the 1989 Phelan report on Wright to
the House ethics committee.

7. Wright has said he did not know Dixon personally. Dixon has said he met Wright in
Washington twice.

8. According to the Phelan report, Mallick placed the blame for the thrift crisis in Texas
on regulators. Green later said Mallick "did not have an intimate knowledge of the bank system
nor the savings and loan industn." He said Mallick's lack of knowledge "was somewhat of a
surprise," given his responsibility for the investigation. Creen said he had thought Mallick
and Wright wanted a balanced perspective but "the balanced perspective . . . that they wanted
is completely absent. . . . (T]his is not even close to a fair exposition of the problem as I would
nev,' it."

9. Black said he heard that Wright later referred to him as "that red-bearded son-of-a-
oitch" in private. The Phelan report referred to Black as "one of the most impressive witnesses
:o appear before the Committee." Wright tried to get Black fired in early 1988, the Phelan
eport said.

10. Frank Annunzio of Illinois was close to the U.S. League for years and represented
he Chicago congressional district of U.S. League President (until he retired in 1988) William
3'Connell. Journalist Kathleen Day reported in The New Republic that Annunzio's chief
')anking aide. Curt Prins, told Gray he wouldn't be able to get a job in the industry after
le stepped down as FHLBB chairman if he didn't stop speaking out about the industry's
jroblems.

11. S&L analysts generally believed a failure rate of 4 percent was something to worry
ibout and 10 percent was leading almost certainly to insolvency.

358 • Endnotes

Chapter 19. The Godfather

1 . The comptroller has principal supemson responsibilit) for the nation's national banks.

2. In the back of this book is a copy of the comptroller of the currency's report on Hennan
Becbc's influence over banks and savings and loans. A careful reading of that report explains
how the Beebe network interrelated during the 1980s.

5. The SEC said Beebe hadn't told investors that he sold to AMI the stock of companies
he controlled, including one company that hadn't made a profit for nine years; he sold stock
to AMI without disclosing what he had paid for it or what A.MI paid him; he arranged for
AMI to loan money to companies he owned; he told investors of a S28,000 AMI asset that
was rcallv worthless; and he included in the AMI prospectus S281,288 in "other assets " that
were in large part just hot air.

4. Beebe reportedly owned a Holiday Inn that Marcello was interested in buying at the
hme.

5. Marcello was convicted in 1981 of mail and wire fraud (the result of the FBI's BRILAB
investigation, which has been called the most massive undercover operation against a single
individual in the FBI's historyl. and in 198> of attempting to bribe a Califomia federal iudge.
After a widely publicized trial, he was sentenced to a total of 17 years in prison.

6. One of Sharp's attorneys, according to reports published in the Dallas Morning News,
was Jake Jacobsen. White House legislative aide to President Lyndon )ohnson from 1965 to
1967. who also controlled three savings and loans involved in the scandal. Jacobsen was
indicted for misapplication of funds. (Before Jacobsen's indictment. John Connally. while he
was the nation's top bank regulator as secretary of the Treasury. 1971-1972, telephoned the
Justice Department several times to express fear that Jacobsen was being treated unfairly, the
Morning News reported. Later Connally was accused of accepting a SIO.OOO bribe in 1971
from Jacobsen acting on behalf of the dairy industry, but Connally was completely cleared of
all charges. Jacobsen pleaded guilty.)

7. Barnes told us they originally met through a mutual friend or at a Holiday Inn con-
vention. Like Beebe, one of Bamcs' businesses was de\eloping Holiday Inns.

8. The information had begun to come to light after Citizens State Bank in Carrizo
Springs, Texas (about 50 miles as the crow flies from Mexico and the Rio Grande), was closed
by state banking officials June 28.

9. One member of the Texas banking network was Richmond Chase Harper, Sr. , who
also ow ned banks. According to documents and testimony entered into the congressional record.
Harper was sued by the Labor Department for feeding horse meat to braceros and was arrested
in 1972 in connection with a plot to smuggle guns to Mexico to be used to overthrow Castro.
Indicted along w ith Harper was Murray Kessler. who had a record of six convictions in federal
and state courts and who was well known to law-enforcement authorities in New York as an
associate of the Carlo Gambino organized crime family. The case ended in a mistrial. Barnes
helped Harper get loans of $1.9 million and S180.000 ftom savings and loans with whom
Barnes and Beebe had a close association. Barnes told us he was introduced to Harper b> the
chairman of the Board of Regents of the University of Texas. He said he did not know kessler.

10. As reported in the Houston Post.

1 1 . Committee on Banking Currency and Housing, Subcommittee on Financial Insti-
tutions Supervision, Regulation and Insurance.

I

Endnotes • 359

12. Regulators testified that George loliii Aiibin and ). B Haralson had had eontrol or
influence o\er more than a dozen banks tiiat were part of the network. Still there was no
reason to worn, about the pair, regulators claimed in 1976, because ". . . neither is active in
Texas banking now, having been removed from control well over 18 months ago." That
optimism would prove to be nothing more than wishful thinking because in the 198()s Aubin
and Haralson got control of tuo Texas S&Ls, lVlereur> Savings Association in Wichita Kails
and Ben Milan Savings in Cameron. The Dallas Morning News reported that in 1984 Anbin
was a $lS,()(10-a-nionth consultant to the hvo thrifts. In 198S the Texas savings and loan
commissioner warned that the thrifts were engaged in "extremely dangerous and questionable
practices" such as "major loans to insiders." including Aubin, according to fortune magazine,
and in 1986 regulators took over the two thrifts, even as E.K. Mutton was wailing that Aubin
had defrauded them of millions of dollars with an elaborate stock and commodity- trading
scam. In granting K.F. Hutton a $48 million judgment against a Haralson company in a
related matter, the judge nevertheless admonished K.K. Hutton for not being more careful in
who they dealt with, saying. "That Aubin was an obfuscating liar is no excuse not to examine
corporate records before assuming an obligation."

1 5. Interestingly, reporter Pete Brewton discovered that Renda and Beebe both had bank
accounts at San Dieguito National Bank in Vista, near La Costa.

14. Another source of funds for La Costa, according to Penthouse magazine, was C.
Arnholt Smith's LInited States National Bank of San Diego, which collapsed in 197^. Smith,
at one time a member of President Richard Nixon's inner circle, pleaded no contest to bank
fraud in 1975. Smith and related entities owed LInited States National Bank more than $400
million when if collapsed, but Tom Nevis eased the pain in 1977 by paying the FDIC $7.4
million for a 12,400 acre ranch once controlled by Smith.

15. Testimony of Tom Nevis in State Savings of Lubbock vs. Doe Valley. Nevis also
testified that he met Beebe in Barker's office.

16. Beebe's old partner Ben Barnes also benefited from Beebe's relationships with the
1980s S&L owners. In the 1980s Barnes was in partnership with John Connally. WFAA-TV,
Dallas, reported that the Barnes/Connally partnership borrowed from 17 S&Ls in three states,
including $40 million from Vernon and an unspecified amount from CreditBanc, where
Barnes's son worked. So well known were Barnes and Connally on the thrift circuit that even
officers at Centennial Savings traveled to Texas to try to interest Connally in a project they
were promoting John Connally went bankrupt when the Texas S&L industry collapsed.
Connally was later hired by a Houston advertising firm to make commercials for Llniversity
Savings Association, Texas's fourth largest S&L. In the ads he urged people to set aside savings.
In February 1989 the FHLBB threw University Savings into a conservatorship and in the first
quarter of 1989 it posted losses of $1. 14 billion.

17. From material gathered by author John H. Davis for Mafia Kmgfish, McGraw-Hill,
1988.

18. In a sworn deposition relating to a 1979 lawsuit filed in Louisiana.

19. He had also been president of Colonial Bank in New Orleans, which the Morning
News reported was owned by Becbc and Reggie.

20. Graffagnmo was convicted in 1983 for obstruction of justice, according to the Morning

Neu's.

21. When Reggie retired, he bought a house next door to Ted Kennedy's home in
Nantucket and lived there about four months a year.

360 • Endnotes

22. In 1982 Reggie purchased the bank's stock in his name as trustee, with no indication
of whom he was a trustee for, and he gave as his address the headquarters of AMI, Inc..
according to the comptroller of the currency report on Beebe.

Chapter 20. Beebe Gets Caged

1. The Federal Building was named, ironically, the Joseph D. Waggonner Federal Build-
ing after Shreveport's longtime congressman, who was also a director of Beebe's Bossier Bank
& Trust and an investor in at least one other Beebe-dominated bank, according to the comp-
troller of the currency report. In 1989 the FDIC sued Beebe, Waggonner, and others for their
involvement in the 1986 collapse of Bossier Bank &i Trust.

2. George Aubin and Jarrett Woods, both of Houston, grew up together. Both were
involved financially with the banking network that was exposed during the congressional
hearings in Texas in the mid-1970s and surfaced again in the S&L scandal of the 1980s,
according to congressional testimony and numerous published reports. Aubin said he intro-
duced Woods to Beebe. Western Savings grew more than 6.000 percent in the four years
Woods was at the helm. 1982 to 1986. The Dallas Morning News reported that another close
associate of Woods was James D. Hague, vice chairman and owner of Liberty Federal Sa\ ings
and Loan of Leesburg, Louisiana, which was closed by regulators who said they had uncovered
self-dealing, poor underwriting, risky lending, and the usual litany. Just as this book was going
to press a law-enforcement official informed us she had just discovered that Morris Shenker
had borrowed heavily from Liberty.

3. By marketing junk bonds through Milken.

4. Drexel Burnham capitalized on the Reagan administration's lax view of federal antitrust
laws and pioneered the use of junk bonds to finance corporate raids and takeovers. Congress
debated crackmg down on the controversial operation, and Drexel contributed hundreds of
thousands of dollars to congressional campaigns. Among the top recipients of their largess was
Rep. Tony Coelho. who was a friend of Drexel's junk bond king Michael Milken. In 1989 it
was revealed that the chairman and CEO of Columbia Savings (Beverly Hills. California).
Thomas Spiegel, bought and held $100,000 in Drexel junk bonds for Coelho unhl Coelho
could come up with his own financing. Eventually half the money, according to Spiegel,
came in the form of a low-interest loan from Columbia Savings (which was itself a heavy
investor in Drexel's junk bonds) which Coelho admitted he failed to report on his financial
disclosure statement the next year The New \ork Times reported Coelho made ncariv Sn,000
on the junk bond investment. The Justice Department opened a preliminary investigation,
the House ethics committee proposed an investigation, and Coelho resigned his House seat
in May 1989.

5. When Milken was indicted for his alleged role in the Wail Street insider trading scandal
that began with the arrest of Ivan Boesky. the government revealed that in 1987 Milken earned
a staggering $550 million from his junk bond operation. His earlier compensation was: 1986,
$294.8 million; 1985. $155.3 million; 1984. $125.8 million; 1985. $45.7 million.

6. Actually it adds up to $29.5 million, but who's quibbling?

7. It was $1 million.

8. Phillips said $27.8 million went to a company affiliated with Beebe but not to Beebe
himself.

9. Published accounts said Nevis sold an option on the property to George Benny, who

Endnotes ■ 361

was convicted for kiting nearly $40 million in checks through banks and thrifts and who sold
the option to Southmark.

10. Wood arranged junkets to the Dunes for some of the Texas S&rLs, including Sunbelt.
Phillips said Wood's contact in the Texas S&L family was )oe Grosz, who was an executive
with San )acinto Savings and Loan in Houston. San )acinto Savings was owned by Southmark
and held millions in Drexel Burnham's junk bonds. Grosz borrowed from Sunbelt Savings to
the tune of over $5 million, in transactions that Sunbelt officials later charged were fraudulent.
Grosz, in turn, had San Jacinto loan $75 million to an Kd McBirncy partnership, the Sunbelt
officers charged in a civil lawsuit.

11. Continental Savings failed in October 1988.

12. Among Pratt's properties was the Sands Hotel and Casino in Atlantic City.

15. Southmark's involvement at Silverado was through its subsidary construction com-
pany, J.M. Peters, and another Colorado company, MDC Holdings Inc. The two had been
involved in an acquisition deal which, had it been completed, would have allowed Southmark
to book a much-needed $25 million profit. Instead, the deal fell apart. MCXi; Holdings Inc.
was another junk bond junkie, having sold $700 million worth through Drexel Burnham
Lambert. The Denver Post reported that its chairman, Larry Mizel, lobbied in Washington
on behalf of Drexel's junk bond operation. The Post described Mizel as one of Colorado's
most powerful businessmen. By the end of 1988, MDC Holdings, whose affairs were intricately
involved with those of Silverado Savings, was suffering severe losses and trying to regroup.

14. "They took a lesson from the Vietnam War: Declare victory and pull out," quipped
Lester La\e, a regulatory expert at Camegie-Mellon University, to a Fortune magazine reporter.

Chapter 21. Round Three

1 . See the comptroller of the currency report in the appendix for some of the details of
his involvement with Beebe.

2. Indicted with Beebe was an associate of Spencer Blain, chairman of Empire Savings,
the first big Dallas S&L to fail.

3. Both Beebe and Wolfe had been indicted in Shreveport in 1984 and convicted in
separate and apparently unrelated cases. Wolfe was convicted of defrauding the government
of $139,000 by fraudulently obtaining milk subsidy payments. He was placed on five years
probation.

4. Reeder ran Carlsberg Management, a former subsidiary of Carlsberg Corporation,
which 10-Ks and Reeder said was a subsidiary of Southmark; federal investigators told us Reeder
was associated with John Boreta, a business partner of casino owner John B. Anderson; when
the Tennessee banking empire of C. H. and Jake Butcher collapsed in 1983 due to fraud (in
the nation's third largest banking collapse since the Great Depression, costing the FDIC $1
billion) and the pair were indicted, the Knoxville journal reported that Reeder guaranteed
their $1 million bail and formed a company, Reeder Equities, to acquire their properties out
of bankruptcy; Reeder tried to play White Knight for San Marino Savings, offering to buy the
thrift when it was on the verge of collapse, according to the thrift's chief operating officer; in
August 1988 Reeder and a partner bought Litton Industries' microwave division and within
three months threw it into bankruptcy (critics said the company had been looted in a bust-
out operation; Reeder said Litton defrauded him by selling him a bankrupt company); in 1989
the FBI was investigating allegations that he purchased insurance companies and had them

362 ■ Endnotes

invest in questionable business ventures that benefited him (Reeder said an employee he later
fired was responsible for these moves).

5. Lapaglia spent a lot of time in New Orleans with his friend Guy Olano at Alliance
Federal Savings, and a U.S. attorney told us Becbe also knew Olano

6. Regulators claimed in the suit that they had been warning Acadia since early 1984 to
stop unsafe loan practices and avoid conflicts of interest.

7. Interestingly, as judge Reggie pointed out to us, the FDIC was complaining on behalf
of Aurora Bank that Rizzo and Dclvecchio had undervalued the propcrtv and the FSLIC was
complaining on behalf of Acadia Savings that Beall and Ma.scoio had ovenalued it.

8. )ohn Lapaglia told us Wayne Newton had millions in shaky loans on properh in the
Poconos, too. and investigators said Newton's prop>ert\ was not far from the Rizzo-Delvecchio
property. There had been much talk that legalized gambling might be introduced into the
northeast Pennsylvania resort area, and federal investigators told us developers were using the
well-known names of Wayne Newton and Frank Sinatra to attract investors. According to
Cage, World Wide Ventures, run by Rapp's budd> Lorenzo Formato, was one of the intended
developers of the Poconos project. World Wide \'entures borrowed hea\ily from Flushing
Federal.

9. Reifler, then a resident of Fort Lauderdale. Florida, was no stranger to law-enforcement
authorities. He had at least four criminal convictions — in Florida and elsewhere, going back
to 1970 — for stock fraud and extortion.

10. One of Governor Edwards's pet projects during his last tenn in office was to bring
big-time casino gambling to Louisiana, and Reggie had been hired by Resorts International
as a $IO,000-a-month consultant. Resorts International, the number one gambling presence
in Atlantic City, made no secret of the fact that they wanted to open a casino in New Orleans.

1 1 . From Cage's affidavit.

12. Kwitny's The Fountain Pen Conspiracy, 197?, is the story of a band of mfernational
swindlers who in the 1960s and early 1970s were "fleecing hundreds of millions of dollars
from banks, businesses, and private investors . . . and getting away with it." Besides Reifler.
two other Kwitny characters showed up in our investigation. One borrowed millions from
Oklahoma thrifts through SISCorp (tied to Charles Bazarian) on grossly overvalued Las Vegas
properties. The other was suspected by FSLIC attorneys of being behind a Texas group that
took over at least one Kansas thrift that later failed. The group borrowed $5 million from Ed
McBirney's Sunbelt Savings to purchase the Kansas thrift. No indictments have been handed
down in these cases.

n. Cage quoted Kwitny: "The associates [Wuensche] identified for the McClellan Com-
mittee might constitute a quorum at a high-level meeting of the New )ersey Mafia: Frankie
'The Bear' Basto. named by a previous witness as the foremost member of the New Jersey
mob's murder squad. .Anthony Little Pussy' Russo. who ran the rackets over a large area and
employed the politically powerful Wilcntz family to provide his legal help in netting hundreds
of thousands of dollars from land sf)cculation financed by banks with which the Wilcntzes are
associated. Angel 'The Gyp' DeCarlo. subject of some of the FBI ca\esdropping transcripts
made public in 1969. Joseph 'Bayonne Joe' Zicarelli. And bloodstained enforcers like Charlie
'The Blade' Tourine and Harold 'Kayo' Konigsberg. Wuensche also said he worked with Satiris
Galahad 'Sonny' Fassoulis and Lionel Reifler, who participated in the Community National
Life Insurance Co. swindle."

14. Reggie's law firm did accept fees from .Acadia customers.

Endnotes • 363

Chapter 22. A Thumb in the Dike

1 Lapaglia believed Gray's insistence on tighter appraisal standards were the cause of the
industry's collapse.

2. Poscn worked for Capliii ,ind Drvsdalc. a law firm heavily involved in representing
S&L interests, and he had been the keynote speaker at the Acapuico conference sponsored by
Lapaglia and Eureka Federal Savings in 1983. Government attorneys told us Caplin and
Drysdalc represented Herman Becbc and Vernon Savings and employees confirmed Judge
Edmund Reggie's daughter, who was aLso an attorney, worked there.

1. Newton was also a friend of Gharles Bazarian, an associate of loan broker Bill Old-
enburg, and an associate of Eureka Federal Savings President Kenneth Kidwell. and a casino
in\estor. His investment in the Poconos was just down the road from the property owned by
jilly Rizzo and Anthony Delveeehio.

4. Curlec represented the Texas League and 20 of Texas's most aggressive thrifts, including
Vernon and Sunbelt. S&'L records show he also had several loans from Vernon.

5. For example, the .Associated Press reported that Fahrenkopf represented Newton in
his bid to get control of the .Maddin Hotel in Las Vegas in 1980.

6. Involved in the complicated transaction were the Buena Vista Bank & Trust in Buena
Vista, Colorado (population 2,000), which collapsed in August 1986, United Savings Bank
and its holding company, Uniwest Financial Corporation in Denver. The Colorado Springs
Gazette Telegraph reported that Newton filed a lawsuit in 1987 in which he charged that he
and other investors had to purchase $1.75 million in stock from Uniwest Financial Corporation
in order to qualify for a loan from one of its subsidiaries. A spokeswoman for the FHLB of
Seattle told the Gazette Telegraph that if Newton's description were correct, the deal could
have been a "kickback, which means it's bribery and a crime." The FDIC, SEC, and FSLIC
were investigating the transactions surrounding the collapse of Buena Vista Bank. A kev figure
in the collapse was a wheeler-dealer from Dallas who was said to have worked for a special
CIA team in Southeast .Asia in the 1960s. Newton declined to discuss the case with Gazette
Telegraph reporter Julie Bird, but Fahrenkopf told her he repaid his loan on time and he was
disillusioned with his partners in the project and with the project itself He said he was trying
to get his $100,000 out of the RV park but, "My lawyers have been unable to get documentation

.1 could have gone anywhere to get a loan. This raises some real questions. I didn't have
to go to Buena Vista. It was presented to me that the financing was all lined up " Neither
Newton nor Fahrenkopf replied to our calls and registered letters.

7. Keating owned American Continental Corporation, which owned Lincoln S&L.

8. A reference to state and federally chartered thrift institutions. The direct investment
regulation was aimed at state-chartered thrifts that were FSLIC-insured.

9. The FSLIC fund that insured those deposits had only $4.6 billion on hand at a time
when thrift failures were piling up like wrecks in a demolition derby, some costing the FSLIC
as much as a billion dollars each.

10. Although the FHLBB was funded through assessments on its member thrifts, its
budget was by law included in the appropriations' process and had to be approved by OMB
before submission to Congress. Staffing levels at the FHLBB, therefore, were subject to OMB
control.

364 • Endnotes

1 1. Kach member thrift owned a number of shares in their district bank and voted as the
bank's shareholders.

12. There was precedent for Gray's move. FDIC examiners did not fall under OMB
control.

15. The average savings and loan examiner's salary' was 25 percent less than the lowest-
paid federal bank examiner in 1984.

14. Supcr\isory agreements and cease-and-desist orders were binding instructions to
thrifts, attempts to force them to adhere to regulations and to manage their assets responsibly.
Gray issued lengthy memoranda in April 1985, December 1985, and February 1986 pressing
for stronger and faster regulatory enforcement.

15. House Subcommittee on Oversight and Investigations of the Committee on Energy
and Commerce.

16. Beverly Hills Savings was the subject of several congressional hearings after it was
revealed its failure would cost the FSLIC between $700 million and $900 million Regulators
said one of the thrift's customers, a mysterious Swiss financier named W emcr K. Rey. had
tried to gain control of the thrift and there was speculation among the congressional staff^that
he may have been acting on behalf of fugitive financier (and suspected drug smuggler) Robert
Vesco, for whom Rey had at one time operated a bank.

17. When the committee issued its report months later they concluded that the FHLBB
was not adequately supervising thrifts. They also complained bitterly that the FHLBB had
failed to supply the documents the committee requested, and they finally had to subpoena
them.

18. In the ensuing years the FHl.BB would be criticized for not suing law firms when
those firms failed to give S&Ls the legal advice they needed to stay out of trouble, and eventually
regulators did begin to file such suits. In 1987 the FSLIC sued Larry Vineyard's law firm, the
third largest law firm in Dallas, for its role in the collapse of State Savings/Lubbock. In .\ugust
1988 the Philadelphia firm of Blank. Rome, Comisky & McCauley agreed to a $50 million
settlement with the FSLIC concerning their alleged failure to properly advise Sunrise Savings
of Boynton Beach, Florida, which collapsed in 1985 amid a swirl of intrigue. Also in August
the FSLIC sued the law firm of Reggie. Harrington and Boswell for its alleged role in the
collapse of Acadia Savings and Loan in August 1987. In December 1988 the FSLIC won a
$35 million judgment against the firm of Mmahat and Duffy, which was paid $5 million for
advising Gulf Federal Savings Bank of Metairie. Louisiana, while the thrift repeatedly granted
loans in excess of Bank Board limits. Gulf Federal failed in November 1986. In some cases
the attorneys also owned stock in the thrift.

Chapter 23. The Touchables

1. North American Savings and Loan failed in 1986 and cost the FSLIC $209 million.

2. Such problems existed, for example, at Vernon Savings and also at San Marino Savings,
where, according to a U.S. Attorney. ". . . the [FSLIC] had notice of possible criminal fraud
almost two years before the institution failed . . . [but] did not make a referral until the
institution closed. The delay created severe document control problems" that destroyed any
possibility of connechng certain documents to the chief executive officer suspected of fraud.

Endnotes • 365

5. It was to this group, about eight montlis later, that regulators presented the 1985
comptroller of the currency report on Herman Becbc.

4. The f''HLBB had to offer prospective buyers billions of dollars in assistance (notes,
lOUs) as an incentive to take the thrifts.

5. Weld later submitted his resignation in protest over Attorney General Ed Meese's
refusal to resign from office amid questions about his business dealings.

6. Many observers faulted the fee attorneys for suing directors of a thrift instead of filing
immcdiatelv to collect on the insurance coverage the directors carried Often the directors
were bankrupt and had no assets to satisfs a civil judgment anyway, critics reasoned, and the
only result of pursuing them m court was higher fees for the fee counsel.

Chapter 24. Friends in High Places

1. Vernon and Sunbelt Savings each cost the FSLIC over $1 billion.

2. The FSLIC bond issue would be repaid through increased assessments on thrifts. The
amount they paid each year to belong to the FSLIC would be increased until the bond issue
was retired.

3. It had been a long-standing tradition that the U.S. League subsidize the chairman's
accommodations when he spoke at U.S. League functions. The chairman would be booked
into a more expensive room than the government payroll allowed for and the League would
pick up the difference.

4. Don Regan was now chief of staff at the White House. He and James Baker had
switched jobs in 1985.

5. FHLBB members were selected by the president and approved by the Senate.

6. Both House and Senate had passed versions of the recap bill in 1986 but too late to
hammer out a compromise. Wright had voted for the bill at that time, after he said he got
assurances from the FHLBB that it would cooperate with Texas S&Ls. The recap was rein-
troduced when Congress reconvened in January 1987. In February the U.S. League announced
an alternative plan for borrowing only $5 billion.

7. In 1988 attorney Robert Strauss represented Wright in a dispute with Bankers Monthly
over a two-part series that detailed Wright's alleged unethical conduct in intervening with Ed
Gray on behalf of Don Dixon. The compromise they reached allowed Wright to submit a
rebuttal to the series. Strauss was a powerful Texan with deep roots. When John Connally
was governor, Strauss was his appointee to the Texas Banking Commission. Strauss was a
Texas banking commissioner from 1963 to 1976. He became known as "Mr. Democrat" while
serving as a Democratic National Committeeman from 1968 to 1972 and chairman of the
Democrat National Committee from 1972 to 1976. In the 1980s he was a law partner in the
prestigious Akin, Gump, Strauss, Hauer and Feld law firm, which had offices in Dallas,
Austin, San Antonio, Fort Worth, Washington, New York, and London. Charles Bazarian
brought Sig Kohnen into CB Financial from the Strauss law firm (Strauss told us Kohnen
had worked for the firm but they never met), and Strauss' son Richard was a Dallas real estate
developer whose records were subpoenaed by the fraud task force. He was not accused of any
wrongdoing. When Roy Green, head of the Dallas FHLB, decided in early 1987 that he and
Joe Selby should meet with Wright (the meeting attended by the Mallicks), he contacted
Strauss to set up the meeting.

366 ■ Endnotes

8. The issue of forbearance was first raised by the L'.S. League during Mouse Banking
Coiiiniittce hearings in January 1987. Wildcat Texas thrift owners immediately began to lobby
their friends ni Washington for forbearance because all they needed to get back on their feet,
they insisted, was time. Forbearance became a popular buzzword of the thrift crisis.

9. Largely because the House Banking Committee, under the leadership of Representative
Femand St Germain (D-R.l.) capitulated once again to the S&L lobbyists.

lU. Regan had been chief of staff at the White House since 1985.

11. The San Francisco FHLB examined Lincoln's books from May 1986 to December
20, 1988 — the longest examination into an S&L in the history of the industry.

12. The Phoenix Gazette obtained a copy of the Eleventh District criminal referral list,
which showed Lincoln had been on it since December 1984.

13. Goodwill is what a business says its customer's support is worth. The use of goodwill
in valuing thrifts has come under attack. As late as 1987 nearly 45 percent of total net assets
claimed by thrifts was goodwill.

14. Columnist Anthony Lewis revealed.

15. By October 1988 Wall had started to change his tune and went so far as to say that
the FSLIC cleanup could cost anywhere from $30 billion to $50 billion.

Chapter 25. What Happened?

1. Writer James Ring Adams reported that when the FSLIC closed down FirstSouth
Savings in Arkansas in 1986, members of the Arkansas congressional delegation wrote letters
of protest to the FSLIC. Then, when they saw the magnitude of FirstSouth 's problems, they
wrote the FSLIC again, asking for the first set of letters back.

2. In 1977, $261 million of the $1.6 billion Central States Pension Fund was in Nevada
(mostly casino-related) investments.

3. By 1985 the fund would have $5.3 billion, but only 6 3 percent — $336 million —
would be invested in real estate and only $34.7 million in Nevada real estate.

4. In an unrelated deal described in published accounts, Rceder in 1988 purchased the
microwave division of Litton Industries, paid no bills after acquiring it, and placed it in
bankruptcy three months later. The FBI was reportedly investigating Reeder's Litton acqui-
sition.

5. Seventy -second report by the House Committee on Government Operations, "Com-
bating fraud, abuse, and misconduct in the nation's financial institutions: current federal efforts
are inadequate," October 13, 1988.

6. The GAO studied the documentation from 184 banks that failed in 1987 and 26 S&Ls
that represented 57 percent of the FSLIC's losses through September 1987. It compared those
failed institutions to a group of similar but solvent banks and thrifts and concluded in January
1989: "Some within the financial inshtutions industrv have expressed the view that the un-
precedented problems and resultant failures are largely due to economic downtums in certain
regions. However, both of our reviews lead to a different conclusion. Well-managed institutions
with strong internal controls appeared able to remain viable despite downturns in local econ-
omies. . . . Under the Bank Board's definitions, fraud or insider abuse existed at each and
every one of the failed thrifts: allegations of criminal misconduct involved 19 of the 26. . . .

Endnotes • 367

Either insider abuse or fraud was present in 64 percent of the 184 (bankl failures." The Bank
Board's definitions of insider abuse and fraud included breaches of fiduciary dutv', self-dealing,
engaging in high-risk speculative ventures, excessive expenditures and compensation, and
conflicts of interest, among others.

7. St Germain did not rclurii our phone calls.

8. The thrift charge accounts and free golfing trips were reportedly provided bv thrift
lobbyist |anics Freeman.

9. According to the third annual survey of executive compensation at publicly held thrifts
published by MCS Associates in Newport Beach, California.

Chapter 26. Taking the Cure

1. Reliance on unregulated mortgage bankers carries risks of its own. A thrift director
who worked with the real estate investment trusts, which failed in huge numbers in the 1970s,
said he saw there the same appraisal scams, phony sales, double books, and theft that char-
acterized the S&L failures of the 1980s, and he believed the parasites that moved from REITs
to S&Ls have now moved into the unregulated mortgage banking industry, where they will
steal from nuddle-income Americans trying to buy homes.

2. $100 billion borrowed at the 1988 10-year Treasury bond rate would cost $1 5. 5 billion
a year for 10 years or $10.8 billion a year for 20 years. Meanwhile, thrift losses continue to
mount at least $12 billion a year — between 1986 and 1988 the loss increased an average of
S16.^ billion a year.

3. Some deals even promised the buyers they would not be on the hook if any of the
real estate they acquired in these deals turned out to be sitting on top of toxic waste. We
wondered if regulators had Consolidated Saving's Carson property or Philip Schwab's Phila-
delphia distillery in mind.

4. MeKinsey & Co., a consulting firm.

5. To .solve the Vernon Savings problem the FSLIC promised $5 billion in government
aid to MacAndrews & Forbes Holding, Inc.'' which took control of five thrifts, including
Vernon. When industry analyst Bert Ely heard about the MacAndrews & Forbes deal, he
said, "I am amazed by the [$5 billion) number. . . . It's just further confirmahon that the
losses are of a far greater magnitude in Texas than the Bank Board has ever been willing to
admit " Ely worried that these deals were a quick fix that will come back to haunt us. "It
appears that we're looking at deals that the country will regret in the not-too-distant future,"
he said. "Someday all this is going to come unglued " Another analyst, Robert Litan of the
Brookings Institute, agreed. "Many of those institutions were far too far gone and should have
been shut down. But the regulators didn't have the cash to just shut them down, so they
arranged these mergers instead. A few of them may actually work. But a lot of them won't.
The whole thing is like Las Vegas."

6. The new owners could write off the thrift's losses, they could deduct their interest
expense, and, to add insult to injury, the substantial cash assistance extended by the FSLIC
(like the $2 billion pumped into American Savings to facilitate the Bass acquisition) is exempt
from federal income tax.

7. Congress has authorized the FSLIC to issue promissory notes to cover debts at failed

368 ■ Endnotes

!

thrifts. The notes will conic due at staggered intervals and as each note conies due the Treasure
will be quietly tapped.

8. In the early 198()s the U.S. government had to bail the two brothers out of trouble
when they overinvestcd in silver before the price fell.

9. The National Thrift News reported that Bush's oil and gas company had a SI million
line of credit at a bank owned by a developer who owned large amounts of Silverado's preferred
stock and received more than $40 million in loans from Silverado. (Bush also sat on the board
of directors of a Klorida company that borrowed over $80 million from failed Western Savings
of Dallas.)

10. Moroney said he was astounded at the incompetence he saw at the Topeka FHLB.
"I've often analogized it to hospital orderlies doing brain surgery. " he told us. After he went
public with his complaints, he said he had to close his S&L consultancy because the FHLB
Topeka wouldn't do business with him.

11. Competition in the marketplace is also phasing out thrifts. Ten years ago thrifts wrote
nearly 50 percent of Americans' home mortgages; in 1987 that share was down to 39 percent.

12. Regulators took over San Marino in 1984.

13. Regulators took over Bell Savings in 1985 and said the institution's failure would cost
the FSLIC fund $565 million.

14. Sued were Anderson, Alford & Ritter (State Savings in Salt Lake City), Cole &
Armbrister (Mountain Security Savings Bank, Wytheville. Virginia), Coopers & Lybrand (First
Federal Savings of Shawnee, Oklahoma), Deloitte Haskins &• Sells (Sunrise Savings of Boynton
Beach, Florida), Grant Thornton (Sunbelt Savings, Dallas), Jeffrey & Pallazolla (North Amer-
ican Savings, Santa Ana, California), Mike Sage (Ramona Savings, Fillmore, California),
Regier Carr (Territory Savings of Seminole, Oklahoma, and Oklahoma Federal of Oklahoma
City), Touche Ross (Beverly Hills Savings of Beverly Hills), and V'anasco & Resnick (Intercapital
Savings of Jacksonville Beach, Florida).

15. TTie American Institute of Certified Public .Accountants has been working on this
issue.

16. Congressional Banking Committee Chairman Senator William Proxmire and Rep-
resentative Fernand St Germain, and powerful building and consumer groups, opposed .ARMs.
The Bank Board could at any time have approved ARMs by regulation, as FHLBB Chairman
Richard Pratt did in 1981, but the Bank Board in the 1970s deferred to Congress' judgment
in the matter.

17. By 1988 solid institutions like giant Great Western Savings (now Great Western Bank)
held loan portfolios that were 90 f)ercent, or more, ARM.

18. A number of versions of bank deregulation are under consideration by Congress,
some far more restrictive than others.

19. Martin Mayer wrote about these 1920s securities affiliates in The Bankers: "These
organizations were without exception a disaster, as the Comptroller of the Currency had warned
in 1920 that they would be: he saw them borrowing from their parents and other national
banks in an endless chain ... for the accommodation of speculative cliques. ' "

20. The Glass-Steagall Act in 1933 forbade commercial banks to own common stock or
to underwrite and sell stock or corporate bonds to their customers or depositors.

Endnotes ■ 369

21. Banks' preiiiiums pay for the FDIC insurance, but like the FSLIC, the FDIC in-
surance is backed by the full faith and credit of the United States government, which means
that if the FDIC went broke, as the FSLIC has, the American taxpayer would have to pay its
debts.

22. Bailed out by the federal government in 1984 to the tune of $4.5 billion.

23. According to David Silver, president of Investment Company Institute, in remarks
before the National Center on Financial Services in New York, April 22, 1988.

Glossary

ADL (Acquisition and Development Loan): Loans that include enough money to
both acquire and develop a propert>-. These loans were ver\' popular at rogue thrifts
for several reasons: They were \ery large loans, allowing thrifts to book big points
and fees; they allowed crooks to borrow huge amounts of money, never buy the land
or develop it, and walk off with the money.

Alligator: A piece of property that produces no income and is a financial burden
because of its large carrying costs, such as real estate taxes and other ongoing expenses.
The P'SLIC was left to wrestle a lot of alligators.

Appraiser: Defined by bankers as a person qualified by education, training, and
experience to estimate the value of real estate (and personal property). Anyone can
call himself an appraiser. Although there are fratemal organizations of appraisers,
there are not universally established or enforced standards. One fraternal organizahon
designates its members as "MAI" appraisers (Members Appraiser's Institute). Many
high fliers used to contend the letters achially stood for "Made As Instructed." a
reference to appraisals done to suit the needs of the borrower.

ARM (Adjust Rate Mortgage): Loans that allow the lender to adjust the interest
rate charged up or down within a certain range as market interest rates rise or fall.

Broker: A person who, for a fee or commission, brings parties together and assists
in negotiating contracts between them.

Bust-out: A mob term used to describe a scam designed to extract large sums of
money from an unsuspecting company or financial institution. The mob has used
bust-outs for decades to gut small firms of their assets. After deregulation they began
busting out thrifts as well.

Capital: The net worth of a business represented by the amount that its assets exceed
liabilities.

370

Glossary • 371

Cash for Trash: Rogue thrifts with lots of repossessed properties on their books would
lend new borrowers more money than they requested and require them to buy one
of the thrift's repossessed properties with the difference as a condition of the loan.
Such deals were dubbed "cash for trash" because the repossessed property was usually
of questionable value.

Caveat Emptor: Latin for "let the buyer beware."

Certificate of Deposit: A written document issued by a financial institution for-
malizing an arrangement between a depositor and institution that outlines the term
(length of time) of the deposit and the rate of interest the institution promises to pay
on those deposits during the agreed-upon term.

Closing Costs: Money paid by borrowers (and sellers) to effect the closing (issuance)
of a loan. Such costs normally include the thrift or bank's loan origination fees,
points, and attorney's fees. Such fees are booked by the loaning financial institution
as income. Fees and points are often "built in" to the loan so the borrower does not
have to take money out of pocket.

Collateral: Property pledged as security for a loan. Collateral can be the property
being loaned on or another property owned by the borrower. It can also be stock, a
promissory note, or other personal property. Whatever is put up as collateral is
supposed to be worth at least as much as the loan it secures.

Commission: A broker's fee for negotiating a transaction, often expressed as a per-
centage of total transaction. Loan brokers were paid a percentage of the total loan.
Deposit brokers were paid a commission ranging from 1 percent to as high as 5
percent of the deposit placed at an institution.

Commitment: An agreement in writing between a lender and borrower to loan
money at an agreed-upon rate and terms at some future date.

Cosigner: One who agrees to assume the debt of the principal borrower if that
borrower defaults on the loan. See also "Kissing the Paper."

Daisy Chain: Rogue thrifts often banded together into what regulators later called
"daisy chains." By helping one another they discovered they could thwart regulators'
efforts to ferret out regulatory violations. These rogue thrifts would make loans to
one another's officers, for example, to circumvent the $100,000 regulatory limit on
how much a thrift could loan one of its own officers. They also shuffled troubled
loans and properties among themselves to hide them from examiners.

Dead Horses for Dead Cows: Rogue thrifts quickly ended up with their portfolios
full of bad loans and repossessed (REO) properties that were real alligators. To keep
thrift examiners from discovering such bad assets, these thrifts worked together with
other rogue thrifts, swapping loans and properties. They would agree that "if you
buy my dead horse, I'll buy your dead cow." When they'd buy a delinquent loan
from another thrift, they would then "roll it over," or refinance the loan, thereby

372 • Glossary

extending the due date into the future. To examiners it would simply appear as a
new loan on the thrift's books.

Deed of Trust: A document used to both convey title to a property while also
evidencing that the property is security for a loan and that ownership is conditioned
upon repayment of that loan. Defaulting on a deed of trust results in foreclosure.

Default: Nonpayment of a loan or other breach of the terms and conditions under
which the loan was granted.

Delinquency: When payments on a loan go into arrears the loan is considered
delinquent until payments are brought current. If a loan continues being delinquent,
the lender can, and often will, foreclose.

Directors & Ofificers Liability Insurance (D&O): Insurance protecting both a cor-
poration and its top managers from legal damages. Thrift officers and directors began
to find it difficult to get D&O coverage beginning in 1985 when many of the
companies providing the coverage became alarmed at what they saw going on at
thrifts.

Disintermediation: When deposit money chases the highest rate of return. When
rates in money market funds were higher than thrifts could pay before 1980, money
left the thrift industry by the billions of dollars and flowed to money market funds.
That was disintermediation.

Encumbrance: Anything that affects or limits title to a property such as loans, leases,
or restrictions.

Equity: The difference between a property's fair market value and what the owner
owes on the property. If the property is 100 percent financed, meaning the borrower
has borrowed the exact amount the property is worth, then the borrower is said to
have no equity left in the property.

FADA (Federal Asset Disposition Agency): An agency created by the FSLIC in
1986 to dispose of billions of dollars in repossessed thrift properties.

Federal Home Loan Bank Board (FHLBB): The regulatory agency that oversees
federally chartered savings and loans. It is also the parent agency of the FSLIC
(Federal Savings and Loan Insurance Corporation), which insures deposits at nearly
all thrifts, both federal and state-chartered. Therefore the FHLBB also sets standards
for state-chartered thrifts with FSLIC insurance coverage.

Finders Fee: A commission or fee paid to the person who brings a client or deal to
another person, company, or institution.

Fixed-Rate Mortgage: A loan on which the interest rate and repayment schedule
are set for the duration of the loan and do not change.

Foreclosure: A legal process by which a lender can repossess property from a borrower
when the borrower fails to fulfill the conditions of the loan for w hich the property

Glossary • 373

is security. The most common reason property' is foreclosed on is nonpayment of
the loan.

Forbearance: The act of refraining from legal or supervisory action. Forbearance,
when applied to the thrift industry, means that, even though a thrift may not be in
compliance with federal regulations, regulators do not take disciplinary action against
the thrift. Instead they gi\e the noncomplying institution time to resolve its com-
pliance problems.

FSLIC (Federal Savings and Loan Insurance Corporation); An agency of the Federal
Home Loan Bank Board that insures deposits at .savings and loans up to $100,000
each.

GAAP (Generally Accepted Accounting Principles): GAAP accounting is consid-
ered slightly preferable to the system employed by thrifts. (See RAP.)

Liquidation: When a seized thrift cannot be repaired by the FSLIC, the institution
is liquidated. Its assets are sold off and the proceeds distributed to the former thrift's
creditors, primarily the [""SLIC.

Kickback: Payment in return for favor. Kickbacks differ from commissions in that
kickbacks are generally not an open part of a transaction and are often illegal. Thrift
officials were often paid kickbacks for making shaky or fraudulent loans. Appraisers
received kickbacks for overappraising properties, etc.

Kissing the Paper: When a borrower was too financially weak to qualify for a large
loan, he would pay someone with a strong financial statement to join him as a
partner in the project. Using that person's financial statement, the borrower could
then get his loan. Once the loan was made the borrower would "buy out" his partner
with a portion of the loan proceeds, thereby relieving that person of any future
liability. The buyout was actually the partner's fee for allowing the weak borrower
to use his financial strength to get the loan. This was called "kissing the paper"
because, in essence, that's all the partner did.

Land Flip: In order to inflate a property's value well above its actual worth in order
to justify the largest possible loan, swindlers would engage in a number of sham
sales of the property, each time raising the sales price. No real cash ever changed
hands during these sham sales. The only purpose of the sales was to record a new
deed, each time reflecting a new, higher price. A property could be "sold" and resold
several times in a single day. Once the desired value was reached the borrower would
get a loan for that amount and later default on it, leaving the lender stuck with a
grossly overencumbered property. Such sham sales were called "flips."

Lender Participation: A loan arrangement in which the lender receives a portion
of the project or its profits as part of the deal. Lender participations were very popular
with rogue thrifts, which would make their loans conditional upon "getting a piece
of the action."

Loan Fee: A charge made by a loan broker for negohating a loan. Also a fee charged

374 ■ Glossary

directly by the lender either for a commitment or at the time the loan funds are
actually advanced. An additional income device used by lenders.

Loans to an Affiliated Person: There are limits on the amount of monev an FSLIC-
insured institution can loan to a person affiliated with the institution. The thrift can
make loans that are secured by the person's principal residence or iiis savings accounts
and loans for home improvements, consumer purchases or education. These loans
are limited to the value of the collateral. The thrift can also make unsecured com-
mercial loans to affiliated persons up to a maximum of $100,000.

Lx>ans to a Single Borrower: There are limits on the amount of money an FSLIC-
insured thrift can loan to each borrower. For unsecured commercial loans, the limit
is \S percent of the thrift's capital. For real estate loans the limit is the greater of
(1) 10 percent of total deposits or 10 percent of capital, whichever is less or (2)
$500,000.

Loan-to- Value Ratio: The ratio of mortgage to property value. Conservative lenders
like to keep their loans at no more than 80 f)ercent of the property's real \alue in
case they must repossess the property. Rogue thrifts routinely made 100 percent loans
on properties and they also often made loans far exceeding the value of the land
securing the loan. In some cases loans exceeded the value of the property by several
hundred percent. The term used for the money in excess of that required for the
project was "walking money."

Mortgage Broker: An individual who brings a borrower and lender together and
receives a commission if a loan is made. The commission is generally a percentage
of the loan. Occasionally loan brokers take their fees in other ways, including a
participation in the property or project. Loan brokers who represented unqualified
borrowers found that they could demand higher fees for putting together shaky deals.
The shakier the deal, or borrower, the higher the fee.

Net Worth: The \alue of total assets less total liabilities.

Nonrecourse Loan: A kind of loan in which the lender's remedies in the event of
default are limited to foreclosing on the property only. The borrower is not personally
liable for any losses suffered by the lender if the property's value does not cover the
outstanding balance on the loan.

Origination Fee: A fee charged by a lender for preparing the loan documents, credit
checks, and projjerty inspections. Origination fees are generally computed as a per-
centage of the loan amount.

Participation Loan: Thrifts often do not keep the loans they make but sell all or
part of them to other lenders who are looking for the interest income. When a thrift
sells a loan that is called a "participation." Also thrifts can join together and make
a loan together. That, too, is a participation loan. Rogue thrifts liked participations
because they allowed them to sell off^to unsuspecting thrifts loans they knew would
eventually go into default.

Glossary ■ 375

Points: Lenders traditionally charge "points" along with loan and origination fees.
Points are a percentage of the loan and can run from 1 percent to 8 percent of the
loan amount. Lenders use points to increase their yield on a loan without raising
the interest rate.

RAP (Regulatory Accounting Principles): An accounting system designed especially
for thrifts that allowed them to hook as assets such intangihlc items as "goodwill."
RAP accounting is credited with oh.scuring the worsening conditions within the thrift
industry until they were heyond repair. Traditional accountants used to using GAAP
(Generally Accepted Accounting Principles) characterize RAP accounting as "smoke-
1 and-mirrors accounting."

Receiver: A court appointee whose responsibility it is to preserve and manage the
assets of a defunct company or institution for the benefit of all its creditors. When
a thrift fails the FSLIC is appointed receiver and the old thrift is referred to as a
receivership.

REO (Real Estate Owned): The term stands for property acquired by a thrift through
foreclosure. Troubled thrifts ended up with a lot of REOs.

Scraping: When swindlers take out a large loan to develop a property, they often
steal some of the loan proceeds by using such methods as double invoicing. They
call this "scraping off^ some of the loan." If they scrape off too much, the project
will go bankrupt, and they often did.

Second Mortgage: A loan that is placed on a property behind an existing first mort-
gage. A second mortgage's rights are subordinate to the first mortgage. If the property
goes into default, the first mortgage holder gets paid first. If any equity remains after
paying the first, the second mortgage holder gets what's left.

Straw Borrower: A person who poses as the borrower on a property but in fact is
fronting for another. Thrifts were limited by regulation from loaning too much to
a single borrower. Straw borrowers were used to get around this limitation. The straw
borrower was generally paid a fee by the borrower for his or her services.

Walking Money: That amount of a loan that exceeds the value of the property
securing it, so named because walk is what the borrower usually does, leaving the
lender with an overencumbered piece of property.

White Knight: White Knights were employed by thrift crooks and high fliers to
forestall unpleasant actions like foreclosure or seizure of their thrift by federal reg-
ulators. The White Knight would suddenly appear, offering to pay top dollar for a
troubled asset. Sometimes the deal would never close, but negotiations bought the
owners additional time. When a deal did close on a White Knight purchase, it would
usually be discovered that the White Knight got his money for the purchase from
another friendly thrift and that loan would later go into default.

Appendix A:
The Comptroller Report on

Herman K. Beebe

MEMORANDUM

Comptroller of the Currency

Administration of National Banks
Washington, D.C.

To: Robert Ahrens, Director, Special Projects

Robert E. Sharpe, Director, Enforcement & Compliance Div.

Rovert M. Krasne, Attorney, Legal Services Div.

June 3, 1985

Re: Final Status Report on the Analysis of Herman K. Beebe's Partici-
pation in the Affairs of National Banks.

As you know, last December I was asked by the Chief Counsel to spend up
to six months analyzing the banking interest of Herman K. Beebe, Sr. ("Beebe")
of Shreveport, Louisiana. The primary objective of the analysis was to determine
the breadth of Beebe's influence or control over financial institutions.

Beebe is neither an officer nor director of any national bank. To the best of
my knowledge, he does not personally own the stock of any national bank. His
influence and control flows through an extensive web of corporate enterprises
and nominees. Two of the more popular vehicles for Beebe's activities involving
financial institutions are AMI, Inc., his Shreveport holding company, and Bos-
sier Bank and Trust Company, the $265 million state chartered bank he dom-
inates. Because Beebe owns two residences in Southern California and spends
the majority of his time there, speculation abounds that he is involved with

376

The Comptroller Report on Herman K. Beebe ■ 377

financial institutions on the West Coast. To date, none of his California activities
or operations have been identified.

I have reviewed dozens of examination reports generated by the OCC, FDIC,
FHLBB and the Louisiana and Mississippi state financial institutions regulatory
agencies. 1 have talked with examining personnel from Louisiana and Texas, as
well as many of the Southwestern District's bank analysts. 1 have also talked with
representatives of the Federal Reserve, FDIC, SEC, IRS, and two United States's
Attorney's offices. Counsel for several business partners of Beebe have also con-
tacted me.

Beebe's Involvement in National Banks:

Beebe's influence or control over national banks does not appear as extensive as
his influence or control over state banks, savings and loans, and insurance
companies. Based on information presently available, the following banks may
in some way be controlled or influenced by Beebe:

1. National Bank of Bossier City, Bossier City, Louisiana.

Ownership: Control Group led by Patterson Affiliates.

Most Recent Examination: 2/28/85

Rating: 3

Asset Size: $113 million

Administrative Action: Cease and Desist Order dated 12/01/81

Jimmy Patterson, principal behind Patterson Affiliates, purchased Na-
tional Bank of Bossier City from Judge Edmund Reggie ("Reggie") (See
attached memorandum for details). In addition, Reggie obtained a
standby letter of credit from the First National Bank of Lafayette, La-
feyette. La., to secure debts of Patterson Affiliates at Bossier Bank and
Trust Co. incurred during their purchase of National Bank of Bossier
City.

2. The First National Bank of Ruston, Ruston, La.
Ownership: Control Group led by Texas State Senator Peyton McKnight.
Most Recent Examination: 1 1/30/84
Rating: 4

378 • Appendix A

Asset Size: $42 million

Administrative Action: Formal Agreement dated IIIQI^I. A Notice of
Charges was sencd 3/26/85.

Peyton McKnight of Tyler, Texas, purchased his interest from Don
Dixon (Dondi Group and Vernon Savings and Loan).

Eleven other entities combine with McKnight to control the bank.
Change in Bank Control Act information on the McKnight and Dixon
acquisitions is not available. In 1982, Dixon contested the OCC's pre-
sumption of control and the OCC agreed that CBCA (Change in Bank
Control Act) filings were unnecessary. McKnight did not submit CBCA
filings either.

Since the last examination, a large kite was discovered which may result
in loss to the bank. The bank's former president was implicated. The
matter was referred to Joe Cage (United States Attorney, Western District
of Louisiana) and should be reviewed at the next examination so that a
removal action can be considered.

5. Bowie National Bank, Bowie, Texas

Ownership: AMI, Inc.

Most Recent Examination: 1/31/85

Asset Size: $17 million

Administrative Action: Cease and Desist Order dated 2/23/83. Enforce-
ment of the Order is in process. The FDIC has initiated a section 8(a)
action.

Richard Wolfe acquired controlling interest with funds borrowed from AMI,
Inc. (Wolfe's Change in Bank Control Act application could not be found in
Central Records). In November 1984 AMI foreclosed on Wolfe's loan and
assumed control of the bank. AMI contested requests for CBCA informahon.
On December 7, 1984, Wolfe was convicted of making false statements and
conspiring to make fraudulent claims against the U.S. Department of Agricul-
ture. On Februarv" 5, 1985. Wolfe was suspended by the OCC from further
participation in the conduct of the affairs of any bank. On May 5, 1985, I
discussed Wolfe's activities with Bill Alexander, Assistant U.S. Attorney, North-
ern District of Texas, and Joe Cage, who indicated that they will investigate
Wolfe's potentially illegal acti\ities (e.g. fictitious loans, misapplication of bank
funds).

The Comptroller Report on Herman K. Beebe • 379

4. First National Bank in Terral, Tcrral, Oklahoma
Ownership: Kenneth O. Arnold

Most Recent Examination: 2/28/85

Rating: 5'

Asset Size: $4 million

Administrative Action: Formal Agreement dated 1 1/21/83. A Cease and
Desist Order proposal is to be presented to ERG in early June.

Arnold is currently subject to a removal action for Regulation O violations
he purportedly committed at Republic Bank, Blanchard, La., another institution
he controls. (In addition to Republic Bank, Arnold also has controlling interest
in the Bank of Benton, Benton, La., American Bank and Trust, Coushatta,
La., and Lake Area State Bank, Hawthorne, Florida.) Arnold has various other
business interests, including insurance and mortgage companies, that are ex-
periencing financial difficulties.

5. Energy Bank, N.A., Dallas, Texas
Ownership: Voting Trust, David Wise, Trustee
Date of Opening: 6/15/82

Declared Insolvent: 5/16/85

6. Park West Bank, N.A. Farmers Branch, Texas

Ownership: Voting Trust, David Wise, Trustee

Date of Opening: 10/03/83

Most Recent Examination: 1 1/30/84

Rating: 4

Asset Size: $21 million

Administrative Action: Notice of Charges served 5/15/85

7. Executive Center Bank, N.A., Dallas, Texas

Ownership: Voting Trust, David Wise, Trustee
Date of Opening: 5/16/84

° A rating of 1 is best, a rating of 6 the worst.

380 • Appendix A

Most Recent Examination: 7/31/84
Rating: 1

Asset Size: $1 1 million
Administrative Action: None

8. Financial Center Bank, N.A., Dallas, Texas
Ownership: Voting Trust, David Wise, Trustee
Date of Opening: Preliminary Charter revoked.

9. First National Bank in Carroliton, Carrollton, Texas

Ownership: Voting Trust, David Wise, Trustee

Date of Opening: Preliminary Charter granted. Final approval under
review in BOS.

David Wise, former ANBE and attorney for Richard Wolfe, assembled
investor groups interested in owning national bank stock and submitted charter
applications for the five banks listed above. His banking consultant was Charles
Gray, former CEO at Citizens State Bank, Princeton, Texas (owned by AMI,
Inc.), and AMTs representative in Texas. Gray served as advisor,' director of
several Wise banks and received generous compensation. Questionable insider
transactions, brokered funds, and an insurance fraud helped promote the demise
of Energy Bank. These activities were referred to Alexander and Cage on May
15, 1985, for possible criminal investigation.

Wise is resigning from the other two banks presently operating and CBCA
applications are pending for William C. Kennedy, Jr. According to NBE Rod
Burgett, Kennedy claims that Gray introduced him to Wise. In 1975, Kennedy
was barred from the securities business by the SEC because of his participation
in a stock manipulation scheme. Kennedy has also been associated with indi-
viduals from the Andover Fund, which was involved with Peoples National Bank
of Rockland County, Ramapo, New York.

10. The First National Bank of Jefferson Parish, Gretna, La.

Ownership: Elton Arceneaux, Preston Wailes, David K. Smith, Gerald
H. Smith

Most Recent Examination: 2/28/85

Rating: 2

The Comptroller Report on Herman K. Beebe • 381

Asset Size: $471 million
Administrative Action: None

Beebe, Dale Anderson (Vice Chairman of the Board, AMI), )ames McKigney
(Chairman of the Board, Bossier Bank and Trust Co.), and Edmund Reggie
together own $1.6 million par value debentures in First Continental Bancshares,
the parent corporation of The First National Bank of Jefferson Parish.

11. The First National Bank of Lafayette, Lafayette, La.

Ownership: Braxton Moody and William Trotter (First Commerce Cor-
poration, New Orleans, has agreed to purchase the bank)

Most Recent Examination: 1/31/85

Rating: 4

Asset Size: $411 million

Administrative Action: Formal Agreement dated 11/08/84

Reggie has a $625 million unsecured standby letter of credit (OAEM) which
purportedly secures debts of Patterson Affiliates at Bossier Bank and Trust Com-
pany. The debts were incurred when Patterson Affiliates purchased the National
Bank of Bossier from Reggie. The credit exceeds the lending officer's limit for
unsecured lending, the Discount Committee approved the credit in favor of
FNB Shreveport and not Bossier Bank and the officer apparently based the credit
decision on the strength of the guarantor, Reggie's brother-in-law. Jimmy Ardoin,
the lending officer, is Vice Chairman of the Board and brother of Clarence
Ardoin, the CEO of Louisiana Bank and Trust, Crowley, La. , which is controlled
by Reggie.

12. Palmer National Bank, Washington, D.C.
Ownership: Harvey McLean

Date of Opening: 6/83

Most Recent Examination: 9/23/83

Rating: 2

Asset Size: $11 million

Administrative Action: None

382 ■ Appendix A

The charter appHcation for the bank could not be located in Central Records.
McLean, a real estate developer and investor, has a multimillion dollar line of
credit at Bossier Bank and Trust Company, a portion of which is classified.
McLean is involved with Bcebe and Don Dixon in I'niversity Springs Joint
Venture. McLean is CEO of Paris Savings and Loan, Paris, Texas.

In addition to the aforemenhoned banks, Beebe may exert some influence
over the following banks:

City National Bank, Plainview, Texas and
Pan American National Bank, Dallas, Texas:

These banks have been controlled by Robert Holmes. Beebe purportedly
had borrowings at the Plainview bank and Jack Pilon, the Dallas bank's CEO,
has been linked to Beebe.

First National Bank, Killeen, Texas

Fort Hood National Bank, Fort Hood, Texas

United National Bank, Houston, Texas: Jerold B. Katz, the controlling
owner of these banks and Killeen Savings and Loan, has been linked to
Beebe through Ed McBirney (Sunbelt Savings), and Jarrett Woods (West-
ern Savings), and Carroll Kelly.

Center Bank, N.A., Dallas, Texas: William C. Kennedy, Jr., is director
of this bank.

First National Bank & Trust Co., Frederick, Ok: Harold M. McBee,
a director at Vernon Savings and Loan, is a director of this bank.

Groos National Bank, San Antonio, Texas: Tom Benson, the controlling
owner of this bank, has purchased Pontchartrain State Bank, Metairie,
La., from Beebe's interests and has other business relationships with
Beebe 's associates.

Banks related to Sam Spikes and Reed Chittin: These individuals and
their institutions had business dealing with State Savings and Loan (Lub-
bock), and Brownfield Savings and Loan, owned by Tyrell Barker. Bar-
ker, who also has ownership interests in Key Savings and Loan,
Englewood, Colorado, and Woodland Savings Bank, Cincinnati, Ohio,
is a Beebe business associate.

American National Bank, Mt. Pleasant, Texas, and

City National Bank, Kilgore, Texas, and

The Comptroller Report on Herman K. Beebe ■ 383

Huntsville National Bank, Huntsville, Texas: Each of these banks has
or has had a significant correspondent banking relationship with Bossier
Bank and Trust Co. Fach relationship includes the purchase of partic-
ipations from Bossier Bank & Trust Co.

The following is a list of state banks controlled by Beebe and his associates
or which conduct .significant correspondent banking with banks controlled by
Beebe and his associates:

Arkansas:

Bank of Bradley, Bradley

Florida:

Lake Area State Bank, Hawthorne

Louisiana:

American Bank & Trust, Coushatta

American Bank, New Orleans

Bank of Benton, Benton

Bank of Commerce, Shreveport

Bank of Coushatta, Coushatta

Bank of Logansport, Logansport

Bank of Louisiana, New Orleans

Bank of Marigouin, Marigouin

Bank of Ringgold, Ringgold

Bank of Southwest Louisiana, Oakdale

Bossier Bank & Trust Co., Bossier City

Capital Bank & Trust Co., Baton Rouge

Citizens Bank, Springhill

City Savings Bank & Trust, DeRidder

Claiborne Bank, Homer

Colonial Bank, New Orleans

Farmerville Bank, Farmerville

384 • Appendix A

First Bank of Natchitoches, Natchitoches

First Repubhc Bank, Rayville

First State Bank, Plain Deahng

First United Bank, Farmerville

jonesville Bank, Jonesville

Mansura State Bank, Olla

Pelican State Bank, Pelican

Peoples Bank, Minden

Planters Bank, Haynesville

Pontchartrain State Bank, Metairie

Republic Bank, Blanchard

United Mercantile Bank, Shreveport

Webster Bank, Minden

Mississippi:

American Bank, Moss Point
Central Bank of Mississippi, Brandon
Commonwealth Bank, Bay Springs
First Bank, McComb
First United Bank, Meridian
Southwest Mississippi Bank, Quitman
Valley Bank, Cleveland

Texas:

Allied Lakewood Bank, Dallas
Azle State Bank, Azle
BancTexas, McKinney
Chandler State Bank, Chandler
Citizens State Bank, Princeton

The Comptroller Report on Herman K. Beebe • 385

Commercial State Bank, San Augustine
First State Bank, Frisco
Dallas International Bank, Dallas
Guaranty Bank, Dallas
Liberty City State Bank, Kilgore
Medical Place Bank (in organization)
South Main Bank, Houston
Western State Bank, Denton

The following is a list of savings and loans controlled by Beebe and his
associates or which conduct significant correspondent business with institutions
controlled by Beebe and his associates:

Colorado:

Key Savings & Loan, Englewood

California:

Beverly Hills Savings and Loan, Beverly Hills
Far West Savings and Loan, Newport Beach
Southern California Savings and Loan, Beverly Hills

Louisiana:

Acadia Savings and Loan, Acadia

Audubon Federal Savings and Loan, New Orleans

First Federal Savings and Loan, Oakdale

Mississippi:

American Savings and Loan, Biloxi

North Mississippi Saving and Loan, Clarksdale

Ohio:

Woodland Savings and Loan, Cincinnati

386 • Appendix A

Oklahoma:

American Federal Savings and Loan, Anadarko

Texas:

Bonham Savings and Loan, Bonham
Brownfieid Savings and Loan, Brownfield
Commerce Savings Association, Angleton
Continental Savings, Angleton
First Savings and Loan, Fort Stockton
First Savings Association, San Augustine
Killeen Savings and Loan, Killeen
Mainland Savings and Loan, Houston
Mercury Savings Association, Wichita Falls
Paris Savings and Loan, Paris
Parkway Savings Association, Dallas
San )acinto Savings and Loan, Houston
State Savings and Loan, Lubbock
Sunbelt Savings and Loan, Dallas
Texana Savings and Loan, Texarkana
Texoma Savings Association, Sherman
Vernon Savings and Loan, Vernon
Western Savings and Loan, Gatesville

The Comptroller Report on Herman K. Beebe • 387

MEMORANDUM

The Enforcement Review Committee
From: Robert Krasne, Attorney
March 4. 1985

Re: The First National Bank of Riiston, Rnston, Louisiana, and Herman
K. Beebe Related Banking Interests.

(This memorandum preceded Krasne's more comprehensive one dated June 5.
This memorandum began by outlining a cease-and-desist order just issued to the
above Beebe-related bank which we do not reproduce here in the interest of space.
The order required FNB-R to accept no further broker deposits, strengthen its
loan collection procedures, and to obtain satisfactory credit information before
making loans, among other things. The balance of the March -i memorandum
deals with Beebe's alleged influence over banks and thrifts.)

First National Bank of Ruston (FNBR) Control
Group:

Peyton McKnight, 9.7%.

Principal Relationships: McKnight is a Tyler, Texas, resident; purchased
stock from Dondi Group, which involved Don Dixon and Vernon Sav-
ings and Loan.

FNB-R Corp, 6.86%

Principal Relationship: Dale Hooper, David Bussell, Dale Anderson, J.
Pat Shows, and H. K. Beebe, Sr., all present or former AMI officers,
each own 20% of FNB-R.

Other Institutions Influenced by H.K. Beebe, Sr.

Based upon information I have gathered to this point, H. K. Beebe, Sr.,
apparently directly owns one bank. However, his corporation, family
members, friends, business associates, and their corporations own banks
which are frequently used by Beebe as sources of credit and conduits for
his financial dealings.

1. Beebe:

Beebe owns 39.5% of Pontchartain State Bank, Metairie, La., a $47
million, "4" rated institution. Beebe's children indirectly own another

388 • Appendix A

39.5% of the bank. As of the most recent (1-6-84) examination. David
Bussell was the CEO.

2. AMI, Inc.:

AMI, Inc., Beebe's primary business entity, owns Bowie National Bank,
Bowie Texas, and Citizens State Bank in Princeton, Texas. AMI owns
81% of Citizens State Bank, a $18 million, "4" rated institution. H. K.
(Ken) Beebe, Jr., is a director and strong influence in the bank. At the
most recent (10-1-84) examination. Ken Beebe and President James
Wood attributed all of Citizens Bank problems to former Chairman
Charles Cray. Wood came to Citizens from Metro Bank, Dallas, in
1978 and became COB in July 1984.

Bowie National Bank was acquired by AMI, Inc.. when they foreclosed
on the stock carry loan of the majorit>' owner, Richard Wolfe. The bank
is in precarious condition. David Bussell is the AMI representative most
active in Bowie's communications with the Southwestern District Office.

3. Beebe's Children:

H.K. Beebe, Sr., has four children: H. K. (Ken) Beebe, Jr., Easter Bunny
Beebe Dixon, Pamela Beebe Gray, and Ruth Anastasia Beebe Chreene.
Each child owns a corporation which holds bank stock. Their corpo-
rations, respectively are WMA, Inc., Easter Bunny, Inc., P. B. Gray,
Inc., and ARIC, Inc.

In addition, the four children own KEPA In\estmcnts, Inc., which owns
Lx)uisiana Nursing Homes, Inc. (a First National Bank shareholder).

Beebe's children's corporations. Dale Anderson (AMI's Vice Chairman
of the Board and a defendant in the recent criminal action in\ol\ing
Beebe), 6001 Financial Corporation (owned by Beebe and Anderson),
Saving Life Insurance Company (an AMI, Inc. subsidiarv), and Beebe

own approximately 55% of Bossier Bank and Trust Co During

the past few years, BB&T has been a participation mill, selling tens of
millions of dollars in loan participations to dozens of other institutional
lenders.

Beebe's four children own 50.28% and Dale Anderson owns 33.8% of
Bank of Southwest Louisiana, Oakdale, La. (BSWL). As of the most
recent examination of this $36 million, rated "4" institution David Bus-
sell was Chairman and Henrv Dickens was President.

The Comptroller Report on Herman K. Beebe • 389

Beebe's daughters Easter Bunny and Pamela own just under 50% of tlie
stoek of City Savings Bankshares, Inc., the parent of City Savings Bank
and Trust Company of DcRiddcr, La. Fdmund Reggie's six children
and Frem Boustany's three children together also own just under 50%
of CSB&T's holding company. Reggie is the former owner of National
Bank of Bossier City and was a frequent business partner of Becbe.
Boustany is Reggie's brother-in-law. When the bank holding eoiupaiiy
was created, Beebe, Reggie and Boustany transferred the bank stoek to
their children for $160/share; $2 cash and $1 58 debt. The children then
exchanged the stock for BUC stoek and the BHC assumed the $158/
share debt. CSB&T is a $5 million "5" rated bank . . . David Biissell
was COB and I'homas Glass, previously of Bossier Bank & Trust, was
president. . . .

4. Beebe's Friends, Business Associates, and their Corporations:

Richard O'Dom orOdom, former owner of First National Bank in Buder,
Alabama, is or was a senior vice president of AMI and director of BB&T.
He has massive debt (nearly $4 million originated at BB&T), most of
which is classified II. Odom owns various banks in Mississippi, most of

which are held under the umbrella of First United Financial Corp

Odom owns a small portion of Southwest Mississippi Bank in Quitman.

David Wise, et al. Wise, a Dallas attorney (he represented Richard
Wolfe) and former ANBE, is a promoter responsible for the chartering
of several national banks in Texas. Wise has several partners in his
banking ventures: William C. Kennedy, Jr., a director of Center Bank,
N.A.; Kenneth Hathaway, an investor who has debt at CSB; Glenn
Loch, CEO of Loch Exploration and shareholder in Gainesville National
Bank, Gainesville, Texas, and Michael R. Lewis. Lewis is CEO and
president of Shannon Oil Company. Lewis, Loch, and Wise own Shan-
non Oil stock. WMA, Inc., Easter Bunny, Inc., P. B. Gray, Inc., and
ARIC, Inc., also own significant quantities of Shannon Oil stock. Lewis
has $184 million debt at Consolidated Bankers Life Insurance Co. of
Shreveport, a wholly owned subsidiary of Savings Life Insurance Co.,
and $68 million at CSB classified II. Consolidated Bankers Life Insurance
Co. owns 28 million of the 950 million shares of common issued by
Energy Bank, N.A. (Dallas).

The Banks Wise, et al, are involved in are Energy Bank, N.A. , Executive
Center Bank, N.A., Park West Bank, N.A., National Bankof Carrollton
(in organization), Financial Center Bank, (in organization). All of these
banks are in the Dallas area.

390 ■ Appendix A

Energv' Bank, the oldest bank in the group, was opened in 1982. Wise
is Chairman of the Board. .\t the most recent examination total assets
had ballooned to S51 million. . . . The preliminar. approvals for the
t\vo banks in organization are being reconsidered.

Shannon Oil has a line (of credit) both in violation of 12 U.S.C. section
84 and classified II at Energj Bank. AMI guarantees a portion of the
credit.

K. O. Arnold has been in\ol\ed in \arious businesses which ha\c been
funded by Beebe or Beebe's related entities, .\mold owns interests in the
First National Bank of Terral, Ok., Republic Bank, Blanchard. La.,
American Bank and Trust, Coushatta, La. . and Lake Area State Bank,
Hawthorne, Florida, .\mold once held stock in Bossier Bank &• Trust.
The FDIC is contemplating section S achon against Arnold for his actions
in his Louisiana state banks.

Han'ey McLean had $5.5 million in debt at Bossier Bank & Trust of
which SI. 4 million was classified (overdue). Collateral for the debt is
202 thousand shares of Palmer National Bank in Washington, D.C.
(PNB). -According to the most recent examination, McLean owned
r?,400 shares (57.87r) of PNB's bank holding company. McLean is a
director of PNB, a $11 million bank. McLean also apparently owns a
significant share of Paris Savings and Loan, Paris. Texas.

Edmund Reggie is believed to own Louisiana Bank and Trust Co.,
Crowley, La. ($41 million in assets) and .\cadia Savings and Loan of
Crowley ($138 million in assets). Re^ie has been indebted to Bossier
Bank and Trust in amounts exceeding $5 million at various times and
has classified credits at various banks. The CEO at Louisiana Bank &•
Trust is the brother of the \'ice Chairman at First National Bank of
Lafayette, La. ($456 million in assets).

Roland Dobson, a member of the control group of First National Bank
of Ruston, is Chairman of the Board at First Bank of Natchitoches, La.,
and owns interest in Moreauxille State Bank and Bank of Coushatta,
La.

John Bennet Wafers, President of AMI, Inc., and Senior \'ice President
and Director of Savings Life Insurance Co., an .\MI subsidiary, is be-
lieved to own a significant portion of Moreauville State Bank. Moreau-
ville. La. ($20 million in assets). Waters has had debt classified II at
FNBR and NBBC, as well as debt classified II, III, and 1\' at Bossier
Bank and Trust and debt classified I\ at CSBB&T and BSWL. His

The Comptroller Report on Herman K. Beebe • 391

business. Fireside Commercial Life Insurance Co., presently has $1.3
million in II debt at NBBC.

Rex Cauble, a convicted drug dealer, has had massive debt at Bossier
Bank and Trust, much of which has been participated out. {FNBR has
$188,000 at II and NBBC has $563,000 at II) BSWL has over $1 nullion
of Cauble's paper. PSB has $500,000 of Cauble"s paper and shows stock
in Dallas International Bank and Western State Bank as collateral for
Cauble's loans.

Gus Mijalis had $4.8 million in debt at Bossier Bank & Trust, of which
$3.5 million was participated out. The balance was classified 11 and III.
His debt at FNBR, $142,000, is classified II at the most recent exami-
nation. He is Chairman of the Board of the Bank of Commerce in
Shreveport. He was indicted by a federal grand jury on February 28,
1985, for his involvement in the nursing home certificate scheme that
also yielded the indictment of Gov. Edwin Edwards. (Later acquitted.)

Dr. Arnold Kilpatrick, a Bossier Bank & Trust director, has $2 million
in debt which originated at Bossier Bank. His $200,000 debt at BSWL
and $97,000 debt at PSB is classified III, Kilpatrick is Chairman of the
Board of Pelican State Bank, Pelican, La. David Bussell is a director of
Pelican Bank.

Fred Bayles was involved in the motel business with and received fi-
nancial support from Beebe. At one time he owned stock in FNBR and
Colonial Bank, New Orleans, La. AMI apparently guaranteed Bayles'
purchase of the Colonial Bank stock. Bayles also apparently bought
American Bank of Jackson Count, Moss Point, Miss., using money
borrowed at Colonial. When he had financial difficulties. Colonial Bank
acquired American Bank and AMI acquired Colonial Bank. David Bus-
sell is Chairman of the Board of Colonial Bank and a director of American
Bank. Edmund Reggie is also a Colonial Bank director.

Don Dixon, a former FNBR shareholder and Bossier Bank & Trust
borrower, apparently has close ties to Vernon Savings and Loan, Vernon,
Texas. Dondi Croup, of which Dixon is a principal, is involved in a
joint venture with Beebe, University Springs Joint Venture. This enter-
prise has $300, 000 debt at Bossier Bank & Trust classified II and $ 1 00,000
at Bank of Benton.

Appendix B:
^^The Five Senators Meeting"

The following memorandum was prepared by Federal Savings and Loan Insur-
ance Corporation official William "Bill" Black. Black accompanied three San
Francisco regulators who had been summoned to Washington, D.C., by five
U.S. senators, each of whom had received sizable campaign contributions from
Charles Keating, his company, American Continental Corporation, its subsid-
iary, Lincoln Savings and Loan, or Keating's employees or associates. The subject
of the meeting was to be the San Francisco FHLB's extended examination of
Lincoln Savings. Regulators contended Lincoln was exaggerating the value of
properties in which it had invested or on which it had made loans.

Black's boss, Federal Home Loan Bank Board Chairman Ed Gray, had asked
Black to report back to him on the meeting, and he took the notes that formed
the basis for this memorandum.

MEMORANDUM

date: April 10, 1987

TO: Edwin J. Gray, Chairman, FHLBB

FROM: William K. Black, Deputy Director, FSLIC

RE: April 9, 1987, Meeting of FHLB-SF Personnel with Senators Cran-
ston, DeConcini, Glenn, McCain and Riegle

At your request I am providing you this memorandum, which reflects the
substance of yesterday's meeting with Senators Cranston, DeConcini, Glenn,
McCain and Riegle. The Federal Home Loan Bank of San Francisco (FHLB-
SF) personnel who attended the meeting were James Cirona, (President and
Principal Supervisory Agent), Michael Patriarca (Director of Agency Functions),

392

"The Five-Senators Meeting" ■ 393

myself (general counsel) and Richard Sanchez (the Supervisory Agent for Lincohi
S&LA of Ir\ine, Calif). The meeting commenced at 6:00 p.m. and ended at
approximately SilS p.m., with two breaks of approximately 15 and 10 minutes
during which time the Senators voted. Senator Cranston was present only very
briefly, because of his responsibilities on the Senate floor. The other Senators
were present for substantially the entire meeting.

This meeting was the product of an earlier meeting among yourself and
Senators Cranston, DeConcini, Glenn and McCain. At that meeting, as related
by you (and by these same Senators in yesterday's meeting) each of the Senators
raised their concerns regarding the examination of Lincoln by the FHLB-SF
and you noted your unfamiliarity with any specifics of the examination, your
confidence in the FHLB-SF and your suggestion that the Senators hear from
the FHLB-SF our supervisory concerns regarding Lincoln.

1 was the only one at the April 9 meeting who took notes. While not verbatim,
my notes are very extensive. At your request, I called you last night and read
these notes to you. I have attached a copy of those notes to this memorandum.
I have used these notes and my independent recall of the meeting to prepare
this memorandum and provide the fullest possible record of the discussions at
yesterday's meeting. I have circulated this memorandum to Messrs. Cirona,
Patriarca and Sanchez for their review to ensure the accuracy of this memoran-
dum. I believe that this memorandum is an accurate and complete record of
the substance of yesterday's meeting.

CIRONA: I am Jim Cirona. I am president of the Federal Home Loan
Bank of San Francisco. I have held that position for four years.
I am here in my capacity as principal supervisory agent. We
have jurisdiction over California, Arizona and Nevada savings
and loans. Before becoming president I was in the industry for
20 years.

DECONCINI: Where?

CIRONA: In New York.

DECONCINI: Did you know Bud Bavasi?

CIRONA: Yes. Bud is a good guy.

DECONCINI: Yes. He's great.

CIRONA: With me is Mike Patriarca, head of our agency function. Mike
has joined us recently from the Comptroller of the Currency,
where he was in charge of multi-national banks. Before that he
was a lawyer for seven years.

394 • Appendix B

McCAiN: We won't hold that against you.

CIRONA: You were a litigator.

PATRIARCA: No, I was in enforcement for seven years.

CIRONA: Also with me is Bill Black, our genera! counsel. Bill was formerly
director of litigation for the Bank Board for three years. Next to
Bill is Richard Sanchez. He's been with the San Francisco bank

for years. Before that he was an auditor for a commercial

bank and before that he was in school.

DECONCINI: Thank you for coming. We wanted to meet with you because
wc have determined that potential actions of yours could injure
a constituent. This is a particular concern to us because Lincoln
is willing to take substantial actions to deal with what we un-
derstand to be your concerns. Lincoln is prepared to go into a
major home loan program — up to 55% of assets. We understand
that that's what the Bank Board wants S&rLs to do. It's prepared
to limit its high-risk bond holdings and real estate investments.
It's even willing to phase out of the insurance process if you
wish. They need to deal with, one, the effect of your reg . . .
Lincoln is a viable organization. It made $49 million last year,
even more the year before. They fear falling below 3 percent
(net worth) and becoming subject to your regulatory control of
the operations of their association. They have two major dis-
agreements with you. First, with regard to direct investments.
Second, on your reappraisal. The\''re suing against your direct
investment regulation. I can't make a judgement on the grand-
fathering issue. We surest that the lawsuit be accelerated and
that you grant them forbearance while the suit is pending. I
know something about the appraisal values [Senator Glenn joins
the meeting at this point.] of the Federal Home Loan Bank
Board. They appear to be grossly unfair. 1 know the particular
property here. My family is in real estate. Lincoln is prepared
to reach a compromise value with you.

CRANSTON: [He arrives at this point.] I'm sorry I can't join you but I have
to be on the floor to deal with the bill. I just want to say that I
share the concerns of the other Senators on this subject. [Cran-
ston leaves.]

DECONCINI: I'm not on the Banking Committee and I'm not familiar with
how all this works. I asked Don Riegle to explain to me how

"The Five-Senators Meeting" • 395

the Federal Home Loan system works because he's on Senate
Banking. He explained it to me and that's why he's here.

McCAIN: Thank yon for coming. One of our jobs as elected officials is to
help constituents in a proper fashion. ACC is a big employer
and important to the local economy, i wouldn't want any special
favors for them. It's like the Apaciie helicopter program that
Dennis and I are active on. The Army wants to cut back the
program. Arizona contractors make major components of the
Apache helicopter. \Vc believe that the Apache is important to
our national defense. That's why we met with General Dynamics
and tried to keep the program alive.

1 don't want any part of our conversation to be improper.
We asked chairman Gray about that and he said it wasn't im-
proper to discuss Lincoln. I'd like to mention the appraisal issue.
It seems to me, from talking to many folks in Arizona, that
there's a problem. Arizona is the second fastest growing state.
Land values are skyrocketing. That has to be taken account of
in appraisals.

GLENN: I apologize for being late. Lincoln is an Ohio chartered cor-

poration, and . . .

ClRONA: Excuse me. Lincoln is a California chartered S&L.

GLENN: Well, Lincoln is wholly owned by ACC.

DECONCINI: You said Lincoln was Ohio chartered. It's California.

GLENN:

RIEGLE:

Well, in any event, ACC is an Ohio chartered corporation. I've
known them for a long time but it wouldn't matter if I didn't.
Ordinary exams take maybe up to 6 months. Even the account-
ing firms says you've taken an unusually adversary view toward
Lincoln. I'o be blunt, you should charge them or get off their
backs. If things are bad there, get to them. Their view is that
they took a failing business and put it back on its feet. It's now
viable and profitable. They took it off the endangered species
list. Why has the exam dragged on and on? I asked Gray about
his. Lincoln has been told numerous times that the exam is
being directed to continue by Washington. Gray said this wasn't
true.

I wasn't present at the earlier meeting. There are things hap-
pening that may indicate a pattern that do raise questions. There
is broad concern on the Banking Committee about the American

396 ■ Appendix B

Banker article on the FADA and FSLIC feud. Gray has great
confidence in you as a team. He says you are some of the finest
people in the system. The appearance from a distance is that
this thing is out of control and has become a struggle between
Keating and Gray, two people I gather who have never even
met. The appearance is that it's a fight to a death. This discredits
everyone if it becomes the perception. If there are fundamental
problems at Lincoln, OK.

I've had a lot of people come through the door feeling that
they've been put through a meat grinder. I want professionalism,
and your backgrounds attest to that professionalism. But I want
not just professionalism, but fairness and the appearance of fair-
ness. So I'm ver\' glad to have this opportunitv' to liear your side
of the story.

GLENN: I'm not trying to get anyone off. If there is wrongdoing I'm on

your side, But I don't want any unfairness against a viable entity.

CIRONA: How long do we have to speak to you? A half-hour, an hour?

DECONCINI: As quickly as possible. We have a vote coming up soon.

CIRONA: First, if there's any fault to be had concerning the length of the
examination, it's on my shoulders. We determine how exami-
nations are conducted. Gray never gave me instructions on how
to conduct this exam or any other exam. At this meeting you'll
hear things that Gray doesn't know.

DECONCINI: Did Gray ever talk to you about the examination of Lincoln?

CIRONA: Gray talked to me when that article ran in the Washington Post.

PATRIARCA: Gray asked for a written response from us to the Washington
Post article about the length of the exam at Lincoln. Jim is
correct. We received no instructions from Gray about the exam
of Lincoln. We decide how to do the exam.

CIRONA: This meeting is very unusual. To discuss a particular company.

DECONCINI: It's very unusual for us to have a company that could be put
out of business by its regulators. Richard you're on; you have
10-12 minutes.

SANCHEZ: An appraisal is an important part of underwriting. It is very
important. If you don't do it right you expose yourself to loss.
Our 1984 exam showed significant appraisal deficiencies. Mr.
Keating promised to correct the problem. Our 1986 exam

"The Five-Senators Meeting" • 397

showed that tlic pr()l)lcins had not been corrected — that there
were huge appraisal problems. There was no meaningful un-
derwriting on most loans. We have independent apprai.sals. Mer-
rill Lynch appraised the Phoenician [Hotel]. It shows a
significant loss. Other loans had similar losses.

DECONCINI: Why not get an independent appraisal?

SANCHEZ: We did.

DECONCINI: No, you hired them. Why not get a truly independent one or
use arbitration — if you're trying to bend over backwards to be
fair. There's no appeal from your reappraisal. Whatever it is you
take it.

SANCHEZ: If it meets our appraisal standards.

CIRONA: The Phoenician reappraisal process is not complete. We have
received Lincoln's rebuttal and forwarded it to our independent
appraisers.

[At this point the Senators left to vote. We resumed when Senators DeConcini
and Riegle returned.]

SANCHEZ: Lincoln had underwriting problems with all of their investments,
equity securities, debt securities, land loans and direct real estate
investments. It had no loan underwriting policy manual in effect
when we began our 1986 exam. When the examiners requested
such a manual they were informed that it was being printed.
The examiners looked at 52 real estate loans that Lincoln had
made since the 1984 exam. There were no credit reports on the
borrowers in all 52 of the loan files.

DECONCINI: I have trouble with this discussion. Are you saying that their
underwriting practices were illegal or just not the best practice?

CIRONA: These underwrihng practices violate our regulatory guidelines.

BLACK: They are also an unsafe and unsound practice.

DECONCINI: Those are two very different things.

SANCHEZ: You need credit reports for proper underwriting.

[Senator Glenn returns at this point.]

RIECLE: To recap what's been said for Senator Glenn: 52 of the 52 loans
they looked at had no credit information. Do we have a history
of loans to folks with inadequate credit?

398 • Appendix B

SANCHEZ: $47 million in loans were classified by examiners due to lack of
adequate credit to assure repayment of the loans.

PATRIARCA: They're flying blind on all of their different loans and invest-
ments. That's what you do when you don't underwrite.

GLENN: How long had these loans been on the boob?

SANCHEZ: A fairly long time.

GLENN: How many loans have gone belly-up?

SANCHEZ: We don't know at this point how many of the 52 have defaulted.
These loans generally have interest reserves.

GLENN: Well, the interest reserves should run out on many of these.

ClRONA: These are longer term investments.

B1J\CK: I know that Lincoln has refinanced some of these loans.

GLENN: Some people don't do the kind of underwriting you want. Is

their judgement good?

PATRIARCA: That approach might be okay if they were doing it with their
own money. They aren't; they're using federally insured deposits.

RIEGLE: Where's the smoking gun? Where are the losses?

DECONCINI: What's wrong with this if they're willing to clean up their act?

CIRONA: This is a ticking time bomb.

SANCHEZ: I had another case which reported strong earnings in 1984. It
was insolvent in 1985.

RIEGLE: These people saved a failing thrift. ACC is reputed to be highly
competent.

BLACK: Lincoln was not a failing thrift when ACC acquired it. It met

its net worth requirement. It had returned to profitability before
it was acquired. It had one of the lowest ratios of scheduled
assets in the 11th District, the area under our jurisdiction. Its
losses were caused by an interest spread problem from high
interest rates. It, as with most other California thrifts, would
have become profitable as interest rates fall.

DECONCINI: I don't know how you can't consider it a success story. It lost
$24 million in 1982 and 1983. After it was acquired by ACC
it made $49 million in one year.

'The Five-Senators Meeting" ■ 399

McCAiN: I haven't gotten an answer to my question about why the exam
took so long.

SANCHEZ: It was an extremely complex exam because of their various
investments. The examiners were actually in the institution from
March to October — 8 months. The asset classification procedure
is very time consuming.

McCAiN: What's the longest exam you ever had before?

CIRONA: Some have technically never ended, where we had severe prob-
lems with a shop.

McCAiN: Why would Arthur Young say these things about the exam —
that it was inordinately long and bordered on harassment?

GLENN: And Arthur Anderson said they withdrew as Lincoln's prior

auditor because of your harassment.

RIEGLE: Have you seen the Arthur Young letter?

CIRONA: No.

RIEGLE: I'd like to see the letter. It's been sent all over the Senate.

[Hands Cirona the letter.]

PATRIARCA: I'm relatively new to the savings and loan industry but I've never
seen any bank or S&L that's anything like this. This isn't even
close. You can ask any banker you know about these practices.
They violate the law and regulations and common sense.

GLENN:

What violates the law?

PATRIARCA: Their direct investments violate the regulation. Then there's the
file stuffing. They took undated documents purporting to show
underwriting efforts and put them into the files sometimes more
than a year after they made the investment.

GLENN: Have you done anything about these violations of law?

PATRIARCA: We're sending a criminal referral to the Department of Justice.
Not maybe; we're sending one. This is an extraordinarily serious
matter. It involves a whole range of imprudent actions. I can't
tell you strongly enough how serious this is. This is not a prof-
itable institution. Prior year adjustments will reduce that re-
ported $49 million profit. They didn't earn $49 million. Let me
give you one example. Lincoln sold a loan with recourse and
booked a $12 million profit. The purchaser rescinded the sale,

400 • Appendix B

but Lincoln left the $12 million profit on its books. Now, I
don't care how many accountants they get to say that's right.
It's wrong. The only thing we have as regulators is our credibility.
We have to preserve it.

DECONCINI: Why would Arthur Young say these things? They have to guard
their credibility too. They put the firm's neck out with this letter.

PATRIARCA: They have a client. The $12 million in earnings was not un-
wound.

DECONCINI: You believe they'd prostitute themselves for a client?

PATRIARCA: Absolutely. It happens all the time.

[The Senators left at this point for another vote.]

[We resumed when Senators DeConcini, McCain, and Riegle returned.]

CIRONA: I also wanted to note that the Bank Board has had a lot of
problems with Arthur Young, and is thinking of taking disci-
plinary action against it.

BLACK: Not for its actions here. Primarily because of its Texas office,

which has never met a direct investment. They think everything
is a loan. This has quite an effect on the income you can claim.

Empire of Texas is a perfect example. It did acquisition,
development and construction loans that were really direct in-
vestments because the borrowers had no equity in the projects.
It booked all the points and fees up front as income. It created
interest reserves so the loans couldn't go into default. It provided
take-out financing and then end loans so that the loans couldn't
go into default for many years. All this led it to report record
profits. Even when the losses started, as long as it grew fast
enough and could book new income up front it could remain
"profitable." It gets to be kind of a pyramid scheme with rapid
growth. Lincoln has grown very fast.

Many congressional hearings have been very critical of the
Bank Board for not acting more quickly against unsafe and un-
sound practices. Representative Dingell our . . . our ... I grew
up in the 16th District. His hearings were ver>' critical about
Beverly Hills [Savings], which had a clean accounting opinion,
and then, at last count, is over $900 million insolvent.

Then there was Sunrise [Savings], also with a clean opinion
and it is expected to cost FSLIC over $500 million. And Con-
gressman Barnard's hearing was very critical there.

"The Five-Senators Meeting" • 401

ciRONA: Also San Marino.

BLACK: Yes. I can tell you from my experience as former litigation

director, where I sued for many of these failed shops, that it is
routine for the accounting firm to .serve as management's expert
witnesses and adopt an extremely adversarial tone.

What it all comes down to is that Congress has been on our
ass, and many of us think rightly, to act before an institution
fails. That's what we're doing here, and 1 think it is laudable.

DECONCINI: What?

BLACK; Laudable.

SANCHEZ: Our exam has found that millions has to be written off Lincoln's
books. That will leave them with a regulatory net worth of $25
million. They will fail to meet their net worth requirement.
They have $103 million in goodwill on their books. If this were
backed out they would be $78 million insolvent.

PATRIARCA: They would be taken over by the regulators if they were a bank.

DECONCINI: You're saying they're insolvent.

BLACK: They'd be insolvent on a tangible capital basis, which is basically

the capital standard for banks.

DECONCINI: They'd be insolvent if they were a bank, but by law you have
to use a regulatory capital standard, and under that standard
they have $25 million in capital. Is that what you're saying?

PATRIARCA: By regulation we have adopted a regulatory capital standard.

DECONCINI: And you'll take control of them if they fail your net worth
standard — you'll take operational control of them.

CIRONA: That's speculative. We'd take steps to reduce their risk exposure.

RIEGLE: What would require them to sell?

CIRONA: We'd probably have them decrease their growth. Time and again
we've found rapid growth associated with loss. Lincoln has grown
rapidly.

BLACK: Are you sure you want to talk about this? We haven't made any

recommendation to the Bank Board yet. The Bank Board decides
what action to take. These are very confidential matters.

402 • Appendix B

DECONCINI: No, then we don't want to go into it. Wc were just asking ven-
hypothetically and that's how you [indicating Mr. Cirona] were
responding.

CIRONA: That's right.

DECONCINI: Can we do something other than hquidate them?

CIRONA: I hesitate to tell an association what to do. We're not in control
of Lincoln, and won't be. We want to work the problem out.

McCAiN: Have they tried to work it out?

CIRONA: We've met with them numerous times. I've never seen such
cantankerous behavior. At one point they said our examiners
couldn't get any association documents unless they made the
request through Lincoln's New York litigation counsel.

RIEGLE: Well, that does disturb me — when you have to go through New
York litigation counsel. What could they do? Is it too late?

CIRONA: It's never too late.

McCAiN: What's the best approach? Voluntary guidelines instead of a
compulsory order?

DECONCINI: How long will it take you to finish the exam?

PATRIARCA: Ten days.

GLENN: Have they been told what you've told us.

PATRIARCA: We provided them with our views and gave them every oppor-
tunity to have us hear what they had to say. We gave them our
classification of asset materials and went through them loan by
loan. This is one of the reasons the exam has taken so long.

SANCHEZ: We gave them our classification materials on January — . On
March 9 we received 52 exhibits, amounting to a stack of paper
this high [indicating approximately two feet of material] respond-
ing to that. We went through every page of that response.

PATRIARCA: We didn't use in-house appraisers. We sent the appraisals out
to independent appraisers. We sent the reappraisals to Lincoln.
We got rebuttals from Lincoln and sent them to the independent
appraisers. I don't think there was any case that Lincoln agreed
with the reappraisal.

SANCHEZ: None where the reappraisal indicated insufficient collateral.

"The Five-Senators Meeting" ■ 403

PATRIARCA: In every case, after reviewing the rebuttal, the independent ap-
praiser has stood by his conclusion.

DECONCINI: Of course. They liad to.

PATRIARCA: No. The rebuttals claim specific problems with the independent
appraisers reappraisals: "You didn't consider this feature or you
used the wrong rental rate or approach to value." I'he indepen-
dent appraiser has come back to us and answered those specific
claims by saying: "Yes, I did consider that, and here's why I
used the right rate and approach."

DKCONCINI: I'd question those reappraisals. If you want to bend over back-
wards to be fair id arbitrate the differences.

The criminality surprises me. We're not interested in dis-
cu.ssing those issues. Our premise was that we had a viable
institution concerned that it was being over regulated.

GLENN:
BLACK:

GLENN:

BLACK:

What can we say to Lincoln?

Nothing with regard to the criminal referral. They haven't, and
won't be told by us that we're making one.

You haven't told them?

No. Justice would skin us alive if we did. Those referrals are
very confidential. We can't prosecute anyone ourselves. All we
can do is refer it to Justice.

DECONCINI: They make their own decision whether to prosecute?

BLACK: Yes. I also want to mention that we are already investigating

Arthur Anderson because of their role in the file stuffing. We
don't know whether they knew the purpose for which they were
preparing the materials. I don't want to get harassed . . . no,
that's not the right word; I don't want to get criticized if we
find out that Arthur Anderson was involved criminally and we
have to make a referral on them. We don't want them to claim
retaliation. We're in a tough spot.

With regard to what you can say to Lincoln, you might
want to simply have them call us. If you really want to talk
to them you can say that it will take us 7 to 10 days to finish
the exam.

RIEGLE: Is this institution so far gone that it can't be salvaged?

404 • Appendix B

PATRIARCA: 1 don't know. They've got enough risky assets on tlicir books
that a httic bad luck could nail them. You can't renio\e the risk
of what they already have. You can reduce what new risb they
would othenvise add on.

BLACK: They have huge holdings in Tucson and Phoenix. The market

there can't absorb them for many years. You said earlier that
ACC was extremeK good but ACC has gotten out of its former
priman, activity, home building. I'm not saying they're bad
businessmen but they had to get out of one home-building
market after another. They had to get out of Colorado when
thc\ had bad models and soil problems. They also had to get
out of their second leading activity, mortgage banking. They're
now down to Arizona.

That's not a bad market but no one knows how well it will
do over the many years that it would take to absorb such huge
holdings in Tucson and Phoenix.

DECONCINI: So you don't know what you'd do w ith the property even if you
took them over?

BLACK: Bill Black doesn't. Bill Black is a lawyer. We hire experts to do

this work. Our study of their Arizona holdings was done by top
experts. Our study of below investment grade corporate debt
securities — what folks usually call junk bonds, but 1 avoid it
because I don't know where you stand on such bonds — was
done by top outside experts. I see in this Arthur Young letter
that they criticize us for having an accountant with "only" eight
years of experience. Well, I think ... I don't see how you can
claim eight years as inexperienced. But we didn't simply rely on
him. We had . . . wasn't it Kenneth . . .

SANCHEZ: Yes. Kenneth, Laventhol.

BLACK: We had Kenneth, Laventhol, outside accountants, work on this.

These are also some of the reasons the exam took time.

PATRIARCA: I think my colleague Mr. Black put it right when he said that
it's like these guys put it all on 16 black in roulette. Maybe,
they'll win, but I can guarantee you that if an institution con-
tinues such behavior it will eventually go bankrupt.

RIEGLE: Well. I guess that's pretty definitive.

DECONCINI: I'm sorry, but I really do have to leave now.

[The meeting broke up at this point, approximately at 8:20 p.m.]

Source Notes

Our goal as we researched this book was to hsten carefully to all sides and to
tr\' to understand how so much money could have been drained out of the S&L
industry. We found unmistakable evidence of widespread fraud and unethical
behavior in the savings and loan industry and we wrote this book to expose it.
Some of the people in Inside Job will feel we have treated them unfairly because
we listened to their stories and drew our own conclusions.

Inside Job presents what we believe, after years of research, to be the accurate
version of events. Those who disagree, many of whom we interviewed, have
told us they intend to write their own books and we hope they do. At least now
readers will have this book by which to measure theirs, and vice versa.

We have made every effort to avoid errors. We have been over the material
time and again looking for mistakes. But because we and our sources are human,
we recognize that, somewhere in this mass of 150,000 words, there may still
reside errors. If that be the case, we apologize and would like to take a page
from Jonathan Kwitny who wrote at the end of his book on organized crime,
Vicious Circles:

For any errors in this book, I sincerely apologize, and if informed of them,
I will be glad to apologize publicly and do my best to see that they are
corrected in any future editions. I am confident that if any errors exist, they
will not be such as to stain the essence of this book; that nobody else could
have done it a whole lot better; and that some of the ones I got right were
real beauts, and more than make up for any slips.

We attempted to interview all of the people who played significant roles in
this book. If we couldn't reach them, we contacted their attorneys. To those
who failed to return our telephone calls we mailed by certified mail, return

405

406 • Source Notes

receipt requested, a list of our questions. Any responses we received, b\ telephone
or mail, we incorpwrated into Inside ]oh where appropriate.

The Federal Savings and Loan hisurance Corporation and the Federal Home
Loan Bank Board are the sources for all estimates of the net worth of an institution
and the losses incurred by an institution or by the FSLIC.

The descriptions of the loans and transactions discussed in this book are
based primarily on allegations made in civil suits filed by the FSLIC and further
details provided by participants (borrowers, brokers, S&rL officers and directors),
regulators, and in\estigators (FBI agents, PSLIC attorneys, U.S. attorneys).

Where we had no firsthand knowledge, we obtained descriptions of f)eople
and settings through interviews with people familiar with the characters and the
scene.

Some of the dialogue is reconstructed as described to us by participants, and
therefore it is only an approximation of the real discussion. The potential for
inaccuracy concerned us, so we kept dialogue to a minimum, even though we
wished we could have enlivened Inside job with more conversation.

We interviewed S&L borrowers, officers and directors, loan and deposit
brokers, developers, bankers, journalists, FBI agents, defense and prosecution
attorneys, private investigators, associates of the principals, regulators and others.
We synthesized what they told us, and then told the story in our own words.
We will not attempt in these notes to attribute each bit of information. However,
we do want to note the important documents and published material that we
used or that would be useful to others researching this subject.

For those readers who wish to expand their knowledge of the thrift industry,
good over\'iews of the Federal Home Loan Bank system are A Guide to the
Federal Home Loan Bank System, published by the FHLB System Publication
Corp., 655 Fifteenth Street, N.W., Suite 510, Washington, D.C. 20005, March
1987; and Fifty Years of Service: Federal Home Loan Bank Board. June 1982,
Volume 15, Number 6 issue of the Federal Home Loan Bank Board journal
published monthly by the FHLBB.

Excellent technical discussions of thrift problems are:

Where Deregulation Went Wrong, by Norman Strunk and Fred Case, United
States League of Sa\ings Institutions, 1988; and Thrifts Under Siege, by
R. Dan Brumbaugh, Jr., Ballinger Publishing Company, 1988.

Testimony before the L'.S. House of Representatives Subcommittee on Com-
merce, Consumer and Monetary Affairs, June 13, 1987; testimony before
the Subcommittee on Financial Institutions Supervision, Regulation and
Insurance of the House Committee on Banking, Finance and L'rban .affairs,
June 9, 1987.

FHLBB Rules and Regulations for FSLlC-insured Institutions, and FHLBB and

Source Notes • 407

FSLIC Outline of Inforniation to be submitted in support of an Application
for Insurance of Accounts ot a Request for a Commitment to Insure Ac-
counts.

Background on the California thrift industry: Commerce, Consumer and Mon-
etary Affairs Subcommittee of the Committee on Government Operations,
U.S. House of Representatives, )unc 13, 1987, in Los Angeles, California;
also, extensive interviews with California Savings and Loan Commissioner
William Crawford.

MEDIA OVERVIEWS:

The National Thrift News and the American Banker have continually pro-
vided the best coverage of thrift deregulation, beginning with the deregulation
debate in the late 1970s. Both publications continue to distinguish themselves
in this area.

Nonindustr>' print media has also done its part in chronicling this crisis and
many reporters around the country have written superb regional stories worthy
of notice. They include:

"hiside Jobs," by Cris Oppenheimer and Scott Herhold, San Jose Mercury News,
Nov. 1-3,' 1987.

"This Is an Epidemic," by Jonathan Lansner and Ann Imse, The Orange County
Register, Nov. 8-11, 1987.

"S&Ls: How They Self-Destructed," by Allen Pusey, The Dallas Morning News,
Nov. 8, 1987.

"Inside Jobs: New War on Bank Fraud," by Tom Furlong and Douglas Frantz,
Los Angeles Times, Jan. 3, 1988.

"Federal Fiasco," by Jeff Bailey and G. Christian Hill, The Wall Street Journal,
March 25, 1988.

"Who to Thank for the Thrift Crisis," by Nathaniel C. Nash, The New York
Times. June 12, 1988.

Series by James O'Shea that began in the Chicago Tribune Sept. 25, 1988.

BusinessWeek cover story, Oct. 31, 1988, by Catherine Yang, Howard Gleck-
man, Frederic A. Miller, Mark Ivey, Teresa Carson, Tod Mason, Todd
Vogel, Paula Dwyer, Joseph Weber, Antonio Fins, and Gail DcGeorge.

Series by Allen Pusey and Lee Hancock in the Dallas Morning News that began
Dec. 4, 1988.

408 • Source Notes

Chapters 1-3

The Rose Garden scene: Several newspaper articles, the White House press
office, Ed Gray, and the National Weather Service.

Ed McBirney party at the Dunes: Texas Monthly article of June 1987, by Byron
Harris and a confidential source who attended the party.

FHLBB viewing of the Empire Savings and Loan video: FHLBB Chairman Ed
Gray.

Depository Institutions Deregulation and Monetary Control Act of 1980, Public
Law 96-221, March 31, 1980.

Garn-St. Germain Depository Institutions Act of 1982, Public Law 97-320, Oct.
15, 1982.

Ex-Governor Dan Walker's bank fraud case, covered in the Chicago Tribune,
especially Aug. 6, 1987, by William B. Crawford, Jr., and Mitchell Locin.

Example of seminars offered by law firms: Course offered by Jeffer, Mangels &
Butler, Los Angeles law firm, copyright 1984 by James R. Butler, Jr.

For sources of information about Ed Gray and developments in Washington,
see notes listed under Chapters 23-25.

North American Savings: Several articles in The Orange County Register, by
Ann Imse, Jonathan Lansner, Cathy Taylor in 1987 (especially Jan. 21,
Feb. 1, and Oct. 4); article by Richard W. Stevenson in The New York
Times, June 30, 1988; article in Los Angeles Times by James S. Granelli,
Oct. 4, 1987; the FSLIC vs. Janet F. McKinzie, et al, 87-00861 HLH(Tx),
U.S. District Court, Central District of California; bankruptcy filing of
James R. Hodges LR88-163M, U.S. Bankruptcy Court, Eastern District of
Arkansas, Western Division; article by Edna Buchanan in the Miami Her-
ald, Aug. 30, 1987 (Masegian's death).

Ramona Savings: The FSLIC vs. John L. Molinaro, et al, 86-6016 AHS(Gx);
passport personnel in San Francisco passport office; articles in The Orange
County Register, by Adam Dawson and Jonathan Lansner in 1987; articles
in Los Angeles Times, by Jane Applegate, John Spano, and Maria L.
LaCanga in 1987 and 1988; USA vs. John Lee Molinaro and Donald P.
Mangano, Sr., CR 87-952-Kn(A), U.S. District Court for the Central
District of California.

Chapters ■f—6

Centennial Savings was in our hometown, and we covered the Centennial

Source Notes ■ 409

story for six years. We interviewed the principals numerous times for newspaper
stories. Much of the information for this chapter coines from six years of inter-
viewing the people involved and those who knew them. We also conducted
extensive interviews with Beverly Haines in 1987 and 1988. Confidential sources
close to the inner working of Centennial, the FSLIC workout of Centennial,
and the FBI investigation provided important leads. Other important sources for
anyone researching Centennial:

The FSLIC vs. Siddharth S. Shah, ct al, C871197 RHS, U.S. District Court
for the Northern District of California.

Bureau of Indian Affairs trust funds: USA vs. Mark Twain Bank, et al, 84-0380-
CV-W-9, in the U.S. District Court of the Western District of Missouri,
Western Division, especially depositions of Terrence Miller and John W.
Vale.

Participations with Atlas Savings: San Francisco Examiner, Aug. 25, 1985.

The FSLIC vs. Leif D. Soderling, et al, C88-0401 JPV, U.S. District Court
for the Northern District of California.

Siddarth Shah: The Santa Rosa Press Democrat article by Joyce Terhaar, Jan.
II, 1987.

Erv Hansen's 1971 Mercedes: William B. Grover, trustee, vs. Centennial Sav-
ings, 1-86-0228, U.S. Bankruptcy Court for the Northern District of Cal-
ifornia, regarding bankruptcy of Erwin Hansen, 1-86-01529.

Congressman Doug Bosco's relationship with Centennial: Article by Steve Hart
in the Santa Rosa Press Democrat, April 19, 1986; article by Seth Rosenfeld
in the San Francisco Examiner, Sept. 15, 1986.

Sheriff Roger McDermott's relationship with Erv Hansen and Centennial: Article
by Bony Saludes in the Santa Rosa Press Democrat, Oct. 17, 1986.

Drug indictment: United States of America vs. Ronald Richard Stevenson, et
al, CR87-737-EFL, U.S. District Court for the Northern District of Cal-
ifornia.

Information about David Gorwitz, Paul Axelrod, and Morris Shenker: The Last
Mafioso, by Ovid Demaris, Bantam Books, 1981, and story by Stephen A.
Kurkjian, Daniel Golden, and Jan Wong about Richard Binder and David
Gorwitz in the Boston Globe, Oct. 21, 1984,

Stories about David Gorwitz and Richard Dolwig, by Drew McKillips in the
San Francisco Chronicle, June 1975.

410 ■ Source Notes

Richard Neil Binder bankruptcy. Chapter 7. 1-86-01236, U.S. Bankruptcy Court
for the Northern District of California.

Centennial Savings and Loan Association vs. Richard N. Binder and Debra L.
Binder, 1-86-01236, filed in the U.S. Bankruptcy Court for the Northern
District of California.

$6 million land deal: Series of stories in the Santa Rosa Press Democrat, April
and May 1986.

Congressman Doug Bosco's response to the seizure of Centennial Savings: Article
by Dick Phillips in the Santa Rosa Press Democrat, Aug. 25, 1985.

FBI questioning Congressman Doug Bosco: Article by Bony Saludes in the Santa
Rosa Press Democrat. Sept. 16, 1986.

Financial condition of Centennial Savings at takeover: Articles by Bob Klose
and Dick Phillips in the Santa Rosa Press Democrat, Aug. 21, 1985, and
by Joyce Terhaar and Bob Klose, Oct. 17, 1986.

United States of America vs. Beverly Haines and Raleigh Yasinitsky, criminal
complaint filed in U.S. District Court, Northern District of California,
Sept. 2, 1986.

Details of FBI's investigation of En Hansen: FBI memorandum of 10-5-87
concerning Operation Buckpass (investigation of Erwin A. Hansen), which
we obtained through the Freedom of Information Act.

Erwin Hansen bankruptcy. Chapter 7, U.S. Bankruptcy Court. Northern District
of California, 1-86-01529.

Soderling sentencing (on same page with sentencing of man convicted of ran-
soming a parrot): The Santa Rosa Press Democrat article by Bob Klose, June
2, 1987.

Transcript of Soderling sentencing hearing. United States of America vs. Leif
Soderling and Jay Soderling, CR-87-0143 RFP; hearing held June 1, 1987,
before Judge Robert F. Pcckham.

The FSLIC vs. Leif D. Soderling. ct al, U.S. District Court for the Northern
District of California, C88-0401 JPV.

The FSLIC vs. Siddharth S. Shah, et al, U.S. District Court for the Northern
District of California, C87-1197 RHS.

United States of America vs. Ted Musacchio, U.S. District Court for the North-
ern District of California, filed in Oct. 1987.

i

Source Notes '411

United States of America vs. Ted Musacchio and Peter Frnnienti, U.S. District
Court for the Northern District of Cahfornia, filed in June 1988.

Bank of Northern California: Bank of Northern California vs. Orange Bancorp
et al, 612275, Superior Court of California, County of Santa Clara; Bel-
mont F. Kelly, et al, vs. Orange Bancorp, ct al, C86-20645 RPA, U.S.
District Court, Northern District of California; U.S.A. vs. Rodney Vernon
Wagner, et al, CR 88-20003WAI, U.S. District Court, Northern District
of California; article by Dick Phillips in the Santa Rosa Press Democrat,
Dec. 1 1, 1986; article in the Press Democrat, Aug. 9, 1987; article by Cris
Oppenhcimer in the San Jose Mercury News, Nov. 21, 1986.

Secret recording by federal investigators: Transcript of a conversation between
Norman B. Jenson, Siddharth Shah, and Michael Stevenson, )ul\ 1, 1985,
Miyako Hotel, San Francisco.

Details of the drug investigation came from stacks of documents we received
from a member of the defense team; articles in the Santa Rosa Press Dem-
ocrat, Oct. 6 and 7, 1987, by Bob Klose and Bony Saludes.

James Schlichtman: Article by Mary Thornton in the Washington Post, Jan.
21, 1988.

Jan. 24, 1986, search warrant affidavit, and Jan. 25, 1986, receipt for property
received from Norman B. Jenson law offices in Las Vegas, Nevada.

Peter Robinson statements concerning his resignation: The Recorder, June 30,
1988.

Chapter 7

The FSLIC vs. Robert A. Ferrante, et al, U.S. District Court, Central District
of California. CV-86-3332 MRP.

Robert Ferrante: FHLB Biographical and Financial Report; stories by Jeff Weir
in The Orange County Register, especially May 24, 1986.

Redondo Beach Police Department incident report of April 12, 1982.

Chester W. Anderson, et al, vs. Condor Development, etc., et al, Superior
Court of California for the County of Los Angeles, NWC 73316.

Quote from Mrs. Ferrante: "Maverick Bankers," Los Angeles Times, Jan. 22,
1987.

Robert Ferrante declaration of May 10 and 12, 1982.

Robin Bohannon declaration of May 12, 1982.

41 2 • Source Notes

Walter Mitchell stories: April 13, 1982, May 23, 1983, July 9, 1983, July 14,
1983, all by Dirk Broersma, Rcdondo Beach Daily Breeze. May 12, 1983,
story by Dan Moraiii and Ricli Council, Los Angeles limes.

United States of America vs. Walter L. Mitchell, Jr., U.S. District Court for
the Central District of California, indictment CR 83-385 and trial mem-
orandum.

Ferrantc loans to Mitchell and Hawaii employment: The SLIC vs. Robert A.
Ferrante, et al, CV-86-3332 MRP. Notice of motion and motion by plaintiff
. . . to compel production of documents by defendant . . . , Feb. 1, 1988.

Martha Gravlec information: May 24, 1986, story in ihe Orange County Reg-
ister, by Ann Imse.

Department of Savings and Loan Organizing Permit of May 12, 1983, signed
by Deputy Savings and Loan Commissioner William J. Clayton.

W. Patrick Moriarty and the Carson City Council: Los Angeles Times of March

27, 1986.

Charles Bazarian: Numerous articles in The Oklahoman by Kevin Laval and
Glen Baylcss, 1985-88; and a three-part series in the Tulsa Tribune, be-
ginning Feb. 11, 1987, by Edward M. Eveld and Mark Davis; numerous
articles in the National Thrift News.

Charles Bazarian bankruptcy, U.S. Bankruptcy Court for the Western District
of Oklahoma, 87-03927-A.

CB Financial Corp. bankruptcy, U.S. Bankruptcy Court for the Western District
of Oklahoma, 87-03928-A.

Sig Kohnen on Bazarian: Tulsa iribune scries.

Process server story: The FSLIC vs. Robert A. Ferrante, ct al., CV-86-3332
RG, transcript of proceedings May 28, 1986.

Ferrante's statements: The FSLIC vs. Robert A. Ferrante, et al, counter-claim/
third party complaint of Robert A. Ferrante for damages, declaratory relief,
injunctive relief, and recoupment; Ferrante's contentions of fact re motion
for temporary and iinnted stay of disco\ery and for protecti\e order.

Ottavio Angotti: F'HLB Biographical and Financial Report; articles by James S.
Granelli, Los Angeles Times, 1985 and 1986; Angotti's answer to the FSLIC
vs. Robert Ferrante, et al suit; "Open Letter to My Friends of the Press
from Ottavio A. Angotti: The Quackery within FSLIC System Calls for
Your Immediate Attention," by Ottavio A. Angotti on July 8, 1986; letter

Source Notes '413

to FHLBB chairman Ed Gray, Oct. 14, 1986; letter to FHLB/San Francisco
President James M. Cirona, July 7, 1986.

Ongoing criminal iinestigation: The FSLIC vs. Robert A. Ferrantc, ct al, tran-
script of proceedings May 27, 1986; Eric Bronk vs. FSLIC, et al, declaration
of Bartly A. Dzivi; Sept. 18, 1987, letter from Frederick D. Friedman to
Don A. Proudfoot, Jr.

Trust Fund Federal Savings Bank: The FSLIC vs. Robert A. Ferrante, et al,
CV-86-3332 MRP, first amended counter-claim/third party complaint of
Robert A. Ferrante for damages, declaratory relief, injunctive relief, and
recoupment.

Angotti threat: Declaration of Darrell S. De Castro and the FSLIC vs. Robert
Ferrante, et al, suit.

Raid on Eric Bronk's office, picture taking, smuggling documents, shredding
documents: Eric C. Bronk vs. the FSLIC, et al, CV-86-5977-MRP, dec-
laration of Bartly A. Dzivi, declaration of John T. McCullough, memo-
randum of points and authorities in support of motion for summary
judgment and for an order specifying facts and issues without substantial
controversy — declarations in support of motion; declaration of Janice H.
Burrill; declaration of Stephen T. Owens; the FSLIC vs. Robert A. Ferrante,
et al, CV-86-3332 RG, transcript of proceedings May 28, 1986, notice of
motion and motion by plaintiff FSLIC to compel production of documents
by defendant Robert A. Ferrante — joint contentions of law and fact — joint
stipulation of counsel re individual requests, stipulation of counsel re motion
by plaintiff FSLIC to compel deposition testimony of defendant Robert A.
Ferrante and for sanctions.

Cheap suit quotes: The FSLIC vs. Robert A. Ferrante, et al, CV-86-3332 RG,
transcript of proceedings May 27, 1986.

Chapters 8-12

Information on broker deposit ban: National Thrift News, Feb. 20, 1984 (in-
cluding Grell quote and Tower information).

Ed Meese: Articles in the San Diego Tribune in February and March 1984 by
Marcus Stern and Denise Carabet.

For other sources on Ed Gray's activities, see notes in section for Chapters

23-25.

Mario Renda and First United Fund: "Linked Financing" series by Richard
Ringer and Bart Fraust in the American Banker, Nov. 15, 16, and 19,

414 ■ Source Notes

1984; "The Rise and Fall of a Money Broker," by Bart Fraust in Newsday,
Sept. 14, 1987, telephone interview with Sy Miller; transeripts of the trial
of U.S.A. vs. Martin Schwiinmer, CR-87-42?, U.S. District Court for the
Eastern District of New York; official "Profile" of First United Fund with
Feb. 29, 1984, message from Mario Renda, First United Investment Com-
pany, Ltd.; First United Management Company, Ltd.; First United Con-
tractors, Ltd.; rough draft of Annual Report, Jan. 26, 1984; Profile of First
Llnited Investment Co.; First United Fund financial statement as of Dec.
31, 1982; Rcnda's desk diaries and appointment calendars, 1981-84; sum-
mary of Mario and Nina Rcnda's American Express records.

Adnan Khashoggi: Fortune article by Louis Kraar, June 1977, and telephone
interview with Kraar in Hong Kong; Time stories by George J. Church and
Richard Stengel, Jan. 19, 1987.

"It was almost an afterthought ..." quote: Dallas Morning News story of Nov.
8, 1987, by Allen Pusey.

Renda and Schwimmcr: Transcripts of the trial of USA vs. Martin Schwimmer
and Mario Renda, CR-87-423, U.S. District Court for the Eastern District
of New York; U.S.A. vs. Martin Schwimmer and Mario Renda, CR-87-
0123{S) in U.S. District Court for the Eastern District of New York; U.S.A.
vs. Martin Schwimmer, CR-86-00528, U.S. District Court of the Eastern
District of New York; transcript of wiretapped telephone conversation be-
tween Frank Manzo and Bill Barone on Aug. 15, 1983; numerous articles
in National Thrift News (Nov. 10, 1986, for Schwimmer's income at First
United Fund).

Indian Springs State Bank: Stories in the Kansas City Star by Lori Shein (es-
pecially Oct. 11, 1987); "Linked Financing" series by Richard Ringer and
Bart Fraust in the American Banker, FDIC examinations of Aug. 23, 1982,
Dec. 10, 1982, Dec. 5, 1983; FDIC meeting with directors, Feb. 15, 1983.

/Fahad Azima: "The CIA, Arms & Global," by James Kindall in the Kansas City
Star, June 10, 1984.

RACE Airways: The Chronology, by the National Security Archive, Scott Arm-
strong, executive director, Warner Books, 1987.

Civellas and Tropicana case: Numerous stories in the Kansas City Star, including
story by Elizabeth Drake about convictions; story ran July 1, 1983.

Henry Tager: Stories in Kansas City Star, including Nov. 18, 1984, story by
Brant Houston (conviction) and Mar. 6, 1985, no byline (sentencing).

The Winklers: The FDIC vs. Mario Renda, et ai, 85-2216-0, in the U.S. District

Source Notes • 415

Court for the District of Kansas; U.S.A. vs. Franklin Winkler and V. l-eslic
Winkler, 87-20049-02 and 03, in the U.S. District Court for the District
of Kansas, including affidavits of Stanley Tobias, Joseph J. DeCarlo, and
Michael A. Brcncscll in support of request for extradition; FDIC vs. F&I
Real Estate Holding Company, et al, 83-2477, in the U.S. District Court
for the District of Kansas.

Renda, Winkler, and Daily's "Linked Financing" scheme: FDIC vs. Mario
Renda, et al, 85-2216-0, in the U.S. District Court for the District of
Kansas, including especially Stanley Tobias's testimony in that case; affidavit
of Michael C. Manning in the matter of the application of the U.S.A. for
a search warrant for the offices of First United Financial Corp. filed in
U.S. District Court for the Eastern District of New York; transcripts of tapes
produced by Fredcrik A. Figge of meetings of Indian Springs State Bank
borrowers for Haiku Partners and Haiku Holdings; FDIC vs. (numerous
straw borrowers including) Peter Michael Chesscn, 83-2476, and Edward
Michael Berr, 83-2461, all in the U.S. District Court for the District of
Kansas; correspondence between Renda, Winkler, Daily, Russo, and the
straw borrowers from 1982 to 1987.

Information and copies of correspondence about Seaside Ventures came from
FSLIC and FDIC attorneys; U.S.A. vs. Mario Renda, 87-CR-423
(SXJMM), in the U.S. District Court of the Eastern District of New York,
temporary restraining order and transcript of the trial.

Palace Hotel: Eric C. Bronk vs. the FSLIC, et al, CV-86-5977 MRP, U.S.
District Court, Central District of California.

Indictment of East Indian: American Banter article of Aug. 1, 1983, by Richard
Ringer.

American Banker, March 26, 1984, story by Jay Rosenstein and Robert Trigaux
and FHLBB report on brokered deposits.

The New York Times, "Money Broker's Books Subpoenaed," by Kenneth B.
Noble, May 17, 1984.

Coronado Savings and Rexford State Bank: FDIC vs. Mario Renda, et al, 85-
2216-0, in the U.S. District Court for the District of Kansas.

Renda plea agreement: May 26, 1988, in case of U.S.A. vs. Mario Renda, 87-
CR-423(SS)(JMM), U.S. District Court for the Eastern District of New
York.

Lawrence S. lorizzo: Affidavit in support of request for extradition of V. Leslie
Winkler and Franklin A. Winkler in U.S.A. vs. V. Leslie Winkler and

416 • Source Notes

Franklin A. Winkler, 87-20049-02 and 0\ in the U.S. District Court for
the District of Kansas.

Chapters 13-14

Mafia, Teamsters, money laundering; President's Commission on Organized
Crime established by Executive Order 12435 on July 28, 1983, several
volumes between Oct. 1984 and April 1986; "Vicious Circles," by Jonathan
Kwitny, W. W. Norton, 1979; "The Crime Business," by Roy Rowan,
Fortune, Nov. 10, 1986; numerous 1988 newspaper articles about trials of
Mafia and Teamster figures; article by Anne B. Fisher in Fortune, April
1, 1985; transcripts of the hearing held by the Permanent Subcommittee
on Investigations, Senate Committee on Government Affairs, concerning
money laundering in Puerto Rico, July 25, 1985; testimony before Senate
subcommittee on investigations of Joseph D. Pistone, 1988, and his book
Dannie Brasco: My Undercover Life in the Mafia, New American Library,
1988; The Teamsters, Steven Brill, Simon & Schuster, 1978.

Michael Rapp: Wall Street Swindler: An Insider's Story of Mob Operations in
the Stock Market, by Michael Hellerman and Thomas C. Renner, Dou-
bleday & Co., Garden City. N.Y., 1977; "A Swindler, a U.S. -issued ID,
and a Web of Fraud, ' by Bart Fraust, the American Btinlter, Mar. 31, 1986;
further Fraust stories in the American Banker on April 22, 1986, May 16,
1986, June 2, 1986, June 18, 1986, March 17, 1987.

Jilly Rizzo: The Last Mafioso, by Ovid DeMaris, Bantam Books, 1981.

Flushing Federal Savings vs. Michael Rapp, et al, 85 Civ. 2356 (JBW), U.S.
District Court, Eastern District of New York.

Depositions of Ronald Martorelli (Sept. 13-17, 1985) and Anthony Del Vecchio
(Sept.-Oct. 1985, June 1986, August 1986).

The FSLIC vs. Carl Cardascia, etal. Civ. 87-0002, U.S. District Court, Eastern
District of New York.

The Fountain Pen Conspiracy, by Jonathan Kwitny, Knopf, 1973.

July 1985 affidavit filed by Andrew B. Donnellan, Jr.

Aurora Bank: U.S.A. vs. Heinreich Rupp, 88-CR-112, U.S. District Court for
the District of Colorado; numerous stories in the Rocky Mountain News
and the Denver Posf 1985-87; story in the American Banker, by Bart Fraust,
Nov. 17, 1986, Aurora Bank vs. Juad S. Jezzeny, John A. Napoli, Sr.,
John A. Napoli, Jr., Michele A. Propato, filed in May 1985; FDIC vs.

Source Notes ■ 417

John Antonio et al, 85-C-I298, U.S. District Court for tlic District of
Colorado.

Rapp threatened Nigrelle: The American Banker, March M, 1986.

John Lapaglia: Several stories in the San Antonio Light in 1985. Testimony in
the trial of USA v.s. Joseph S. Ascani, et al, CR-86-202R, U.S. District
Court, Western District of Washington at Seattle.

Wayne Newton; Las Vegas Review-Journal article by Richard Cornett, May 17,
1984.

Philip Schwab: Buffalo Evening News, several stories, Jan. through April 1966;
St. Petersburgh Times story by Bradley Stertz, Sept. 27, 1987; "The Rush-
ville Connection," a series in the Indianapolis Star beginning Oct. 18,
1987.

Philip Schwab sang to Mary: Buffalo Evening News, May 7, 1970.

Players Casino: 73-page description/proposal subsequent to Eureka Federal Sav-
ings' foreclosing on Schwab; a Reno Gazette Journal story by Susan Voyles,
Nov. 8, 1986.

Kenneth Kidwell and Eureka Federal Savings: San Francisco Examiner story by
Paul Shinoff, April 12, 1985; San Francisco Chronicle story by Gail E.
Schares, July 15, 1985; several stories in the Santa Rosa Press Democrat,
1984-86; Eureka Federal Savings and Loan Association, et al, vs. Ken-
neth L. Kidwell, et al, C86-1245, U.S. District Court for the Northern
District of California; the Santa Rosa Press Democrat, July 28, 1984, and
Sept. 11, 1984.

Freedom Savings: The National Thrift News, in March and July 1985.

Sig Kohnen on why Bazarian bought stock in banks and S&Ls: The Tulsa Tribune
series by Edward M. Eveld and Mark Davis, Feb. 11-13, 1987.

Florida Center Bank: U.S.A. vs. John A. Bodziak, Jr., et al, GJ 86-1-26, U.S.
District Court, Middle District of Florida, Orlando Division; the Tulsa
Tribune series, which began Feb. 11, 1987.

Wolk, Farrell, Zaccaro business relationship: National Thrift News article on
July 27, 1987.

Chapter 15

Home Savings, Irving Savings, and Alliance Savings actitivies: U.S.A. vs. Jo-
seph S. Ascani, et al, CR-86-202R, in the U.S. District Court, Western

418 • Source Notes

District of Washington at Seattle, especially superseding indictment and
trial brief; KSLIC vs. Guy W. Olano, Jr.. et al, 86-0472, U.S. District
Court in the Eastern District of Louisiana, including depositions of Con-
vention Center Investments Co., Inc., and Michael Speaks vs. Norman B.
Jensen, et al, A24'5197, Judicial District Court of the State of Nevada in
and for the County of Clark; Minor Leasing, Convention Center Invest-
ments Co., Inc., Norman B. Jensen, Michael Speaks vs. FSLIC, et al,
CV-S-86-494 HDM, U.S. District Court for the District of Nevada, es-
pecially depositions of Norman B. Jenson, May 5-7, 1987, and file of
supporting documents; numerous stories in the National Thrift News,
1986-88 (Oct. 27, 1986, article by Bill Voelker gives information about
other investigations of Olano).

Norman B. Jenson: Las Vegas Sun, March 25, 1980; financial statements of
Nov. 15, 1980; UPI article of April 28, 1981; Las Vegas Review-Journal
article by Richard Cornett, May 17, 1984.

Philip Schwab's quid pro quo: June 26, 1986, letter from Schwab to chairman
of the board and CEO of Freedom Savings, F. Philip Handy.

Eric Bronk's trips to Tampa: Exhibits for the FSLIC vs. Robert A. Ferrante, et
al, 86-3332, U.S. District Court, Central District of California.

First Federal Savings of Shawnee sued Bazarian: National Thrift News story , by
Kevin Laval, May 16, 1988.

Report prepared by Casino Control Corp. for Philip Schwab regarding his ap-
plication for a casino license for the Players Casino in Reno, Nevada.

Schwab bankruptcy: The New York Times story, by Albert Scardino, Jan. 11,
1988; list of Cuyahoga Group and/or Mr. & Mrs. Schwab banks and cred-
itors. Also Brad Stertz of the St. Petersburg Times.

John Anderson: Numerous stories between 1981-86 in The Valley Times. Las
Vegas Sun, Las Vegas Review-Journal, Reno Gazette Journal (especially
Sept. 18, 1985), The Wall Street Journal, May 24, 1984; St Louis Post-
Dispatch story as described by the Las Vegas Sun, Nov. 16, 1982.

Mitchell Brown: Marin Independent Journal article, March 28, 1987, by Renee
Koury; 1987 Dun and Bradstreet report on Wells International, Inc.

State Savings/Corvallis: U.S.A. vs. Brian John Olsvik, et al, filed May 1988,
U.S. District Court for the District of Oregon; FSLIC vs. numerous related
parties, 86-676, 86-1436, 86-1205, 86-1436, 86-1390, 86-1648, 87-1025;
numerous stories in the National Thrift News and the Portland Oregonian.
1986-88; interviews with two defense attorney's.

Source Notes ■ 419

San Marino Savings: The FSLIC vs. Edward A. Fordc, et al, U.S. District
Court for the Central District of California, 85-774-WDK; San Marino
Savings joint proxy statement and offering circular of Dec. 28, 1982; April
15, 1983, Report of Examination by FHLBB Office of Examinations and
Supervision; San Marino Savings Annual Report to the EHLBB/FSLIC for
fiscal year ended Dec. 31, 1982; McGladrey Hendrickson & Co. report of
Jan. 12, 1983, and letter of Jan. 20, 1983; memo to files by G. N. Lubushkin
on Oct. 29, 1983; FHLBB letter to San Marino Savings board of directors
March 14, 1983; FHLBB recommendation for appointment of conservator,
Feb. 3, 1984; San Marino Savings vs. FHLBB, et al, 84-0776 RJK, in U.S.
District Court for Central District of California, including declaration of
Edward A. Forde and defendants' opposition to application for temporary
restraining order.

First United Fund deposits at San Marino Savings: American Banker series by
Richard Ringer and Bart Fraust, Nov. 15, 16, and 19, 1984.

Bona and Domingues: The Orange County Register four-part series by Jonathan
Lansner and Ann Imse, Nov. 8-11, 1987; the Atlantic City Press three-
part series by Daniel Heneghan, Oct. 7-9, 1985; FHLBB memo of Sept.
28, 1983, from Glen Sanders to Donald McCormick; April 8, 1984, story
by Jon Standfefer in the San Diego Union; marketing agreement of July 21,
1982, between San Marino Savings (Forde and Casanova), Bona and Do-
mingues; various correspondence between San Marino Savings and Bona-
Domingues; Feb. 8 and Feb. 24, 1983, analysis of Bona-Domingues
projects; D&B Development Company, Inc., vs. Frank J. Domingues, CV-
85-774-WMB, in U.S. District Court, Central District of California; article
by Michael Kinsman in San Diego Tribune, Oct. 5, 1987; Dunes Casino
Development, Ltd., prospectus of April 11, 1986; Domingues' ouster, Los
Angeles Times story of March 4, 1985.

Zulu projects: Edward V. Casanova deposition, June 25 and 26 and July 1,
1987, for the FSLIC vs. McGladrey, Hendrickson & Co., et al, CV-85-
2975-WMB, and the FSLIC vs. Edward A. Forde, et al, CV-85-774-WMB,
both in U.S. District Court for the Central District of California.

Steve Goodman: The FSLIC vs. Robert A. Ferrante, et al, CV-86-3332 MRP,
notice of motion and motion by plaintiff FSLIC to compel production of
documents by defendant Robert A. Ferrante; joint contentions of law and
fact; joint stipulation of counsel re individual requests.

Report on condos: San Marino Savings in-house memo of Feb. 7, 1983; Ed-
ward V. Casanova deposition, June 25 and 26 and July 1, 1987, for the
FSLIC vs. McGladrey, Hendrickson & Co., et al, CV-8 5-297 5-WMB, and

420 ■ Source Notes

the FSLIC vs. Edward A. Forde, et al, CV-85-774-WMB, both in U.S.
District Court for the Central District of Cahfornia.

American Savings and Loan vs. Leonard Pellulo, et al, 86-2261 RMT(Tx), U.S.
District Court, Central District of California.

Morris Shenker, Teamsters, Mafia: President's Commission on Organized
Crime, report to the President and the Attorney General on organized crime,
business, and labor unions, Dec. 31, 1985; several bankruptcy articles in
St. Louis Post-Dispatch in 1984; bankruptcy 84-00001, U.S. Bankruptcy
Court, Eastern District of Missouri, Eastern Division; see listings under
Chapters 13-14.

Sun Savings: U.S.A. vs. Daniel W. Dierdorff, CR 88-0542-R, U.S. District
Court, Southern District of California; Sun Savings and Loan Association
Form 10-K for fiscal year ended Dec. 31, 1985, and Form 10-Q for quarter
ended March 31, 1986.

Chapters 16-19

William J. Oldenburg: San Francisco Examiner, April 29, 1984; The Wall Street
Journal, June 8, 1984.

Charles Knapp: "Lender's Lament," by David B. Hilder in The Wall Street
Journal, June 23, 1987; several articles in The Wall Street journal, Aug.
16, 23, 29, 1984; article by Thomas C. Hayes in The New York Times,
July 11, 1984; article in Fortune by Gary Hector, July 12, 1982.

For further source material on Ed Gray's activities, see listings for Chapters

23-25.

Texas: Article in Texas Business, by Geoffrey Leavenworth, Feb. 1988; article
in Dallas Times Herald, by Ross Ramsey, Aug. 16, 1987; "The Party Is
Over," by Byron Harris in Texas Monthly, June 1987; several news reports
by Byron Harris on WFAA-TV in Dallas 1986-88; "S&Ls: How They Self-
Destructed," by Allen Pusey in the Dallas Morning News, Nov. 8, 1987;
"Loan Stars Fall in Texas," by Bill Powell and Daniel Pedersen in News-
week, June 20, 1988; "Texas S&L Disasters Are Blamed, in Part, on Free-
wheeling Style," by Leonard M. Apcar in The Wall Street Journal, July
13, 1987; "S&L Trouble Felt Beyond Texas Border" (about participations)
by Robert Dodge, the Dallas Morning News, Sept. 28, 1987; series by Allen
Pusey and Lee Hancock that began in the Dallas Morning News, Dec. 4,
1988.

Source Notes ■ 421

Don Dixon and Vernon Savings: "Beware of Texan Bearing Gifts," by Susan
Burkhardt in the San Diego Union, Aug. 9, 1987; "Break the Bank," by
Byron Harris in Texas Monthly, Jan. 1988; supervisory agreement between
the FSLIC and Vernon Savings, Aug. 16, 1984; cease-and-desist order
issued by the FHLBB to Vernon Savings, June 19, 1986; FHLBB approval
of Dondi Financial Corp.'s acquisition of Vernon Savings, June 29, 1982;
Vernon Savings list of allowances for loan losses, Sept. 30, 1986, and Nov.
30, 1986; Vernon Savings workout list of projects, Feb. 8, 1987; the FSLIC
vs. Don R. Dixon, et al, CA 3-87-1 102-G, in the U.S. District Court for
the Northern District of Texas, Dallas Division, including affidavits of
Norman G. Oldham, Daryl Ray Tucker, Gordon J. Reid, Gralee P. Parr,
William H. Degan, James E. Poole, James R. Alberts, Jim Wright, Charles
Galindo, James S. Hinman, Robert Torres (and exhibits). Gene Webb,
and Alfred Beltran-Romero, statements of Linda Shivers, Chris Barker, and
Nancy Home, the FSLlC's supplemental memorandum of law in support
of its motion for preliminary injunction; Jack R. Brenner and Construction
Financial, Inc., vs. Vernon Asset Management Corp., et al, 581981, Su-
perior Court of the State of California, County of San Diego; U.S.A. vs.
JohnC. Smith, CR3-88-016-T, in the U.S. District Court for the Northern
District of Texas, Dallas Division; U.S.A. vs. John V. Hill, CR 3-88-0059-
H, in the U.S. District Court for the Northern District of Texas, Dallas
Division, and subsequent guilty plea on March 24, 1988; U.S.A. vs. Roy F.
Dickey, Jr., CR 3-88-160-T, in the U.S. District Court for the Northern
District of Texas, Dallas Division; flight logs; U.S.A. vs. Woody F. Lemons,
CR 3-88-234-T, U.S. District Court, Northern District of Texas, Dallas
Division.

Dixon's Solano beach house: Walter J. Van Boxtel and Roseann S. Van Boxtel
vs. Harvey McLain, etal, 581506, Superior Court of the State of California,
County of San Diego, especially depositions of Glenn Edward Billingsley,
Walter J. Van Boxtel, and Roseann Van Boxtel.

Terry Barker and State/Lubbock: U.S.A. vs. Donald W. Nahrwold, CR 3-88-
019-T, U.S. District Court for the Northern District of Texas, Dallas Di-
vision; U.S.A. vs. Larry K. Thompson, CR-5-88-002and024, U.S. District
Court, Northern District of Texas; U.S.A. vs. Tyrell Barker, CR-3-88-017-
D, U.S. District Court, Northern District of Texas; guilty pleas of Larry K.
Thompson and Tyrell G. Barker, Feb. 8, 1988; story by Pete Brewton in
the Houston Post, July 10, 1988; U.S.A. vs. Sammy Wayne Spikes, et al,
CR 5-86-041, in the U.S. District Court for the Northern District of Texas,
Lubbock Division; story by Pat Graves in the Lubbock Avalanche-Journal,
Jan. 31, 1987; the FSLIC vs. Laurence B. Vineyard, Jr., et al, CA 5-87-

422 ■ Source Notes

124, in the U.S. District Court for the Northern District of Texas, Lubbock
Division; U.S.A. vs. Donald D. Campbell, CR-3-88-144-T, U.S. District
Court for the Northern District of Texas.

Tom Nevis and Nevis Industries: Numerous stories in the Yuba-Sutter Appeal
Democrat 1977-88; Eureka Federal Savings vs. Nevis Industries, Inc., et
al, 298371, Superior Court of California, County of San Mateo; Cargill,
Inc., and Universal Rice and Grain Establishment vs. Pacific International
Ag-Products, Inc., et al, 35098, in the Superior Court of the State of
California in and for the County of Sutter; 1981 corporate profile of Nevis
Industries, Inc.; State Savings of Lubbock vs. Doe Valley of California,
Inc., et al, 92253, in the Superior Court of the State of California in and
for the County of Butte, especially depositions of Thomas E. Nevis; Dun
and Bradstreet report on Nevis Industries, Inc., and Doe Valley, Inc., June
15, 1987; Nevis Industries, Inc., Adams Esquon Ranch, Inc., Thomas E.
Nevis, Samuel A. Nevis, Doe Valley of California, Inc. vs. Eureka Federal
Savings, et al, 298371, cross-complaint; Rick L. and Gay Lee Willard,
Roland K. Martin vs. Sioux Corp., et al, 13-221, in the U.S. Bankruptcy
Court in and for the District of Nevada, especially 2004 examination of
Thomas E. Nevis on Feb. 25, 1985; promissory note June 25, 1981, for
$2 million payable to Joseph F. Arroyo, signed by Thomas E. Nevis.

Jack Franks: JDF Financial Corp. corporate profile and Jack D. Franks personal
profile; U.S.A. vs. Jack D. Franks, CR 3-88-196-R, U.S. District Court,
Northern District of Texas, Dallas Division.

Nevis ordered to pay $11.3 million: Yuba-Sutter Appeal Democrat story, Oct.
3, 1988, by Eric Vodden.

Flipping land like registering for college classes: Series by James O'Shea for the
Chicago Tribune that began Sept. 25, 1988.

Joe Selby: Article by Jim McTague in the American Banker, June 6, 1988.

Westwood Savings: FSLIC vs. Edward Israel, et al, CV-87-04124 WDK (Tx),
U.S. District Court, Central District of California.

Scott Mann: Article by Brooks Jackson in The Wall Street Journal, June 30,
1988; report to California S&L Commissioner William Crawford from Lynn
Gray, Oct. 20, 1988.

Tom Gaubert: U.S.A. vs. Thomas A. Gaubert, CR88-44, in the U.S. District
Court for the Southern District of Iowa.

George Mallick: Article by Brooks Jackson in The Wall Street Journal, Aug. 5,
1987.

Source Notes ■ 423

Political pressure: Article by Andrew Mangan of the Associated Press in the
Arkansas Gazette, July 19, 1987; articles by George Archibald in the Wash-
ington Times, June 24 and Aug. 24, 1988; Honest Graft, by Brooks Jackson,
Knopf, 1988; "The Wright Man to See," by Rich Thomas and David Pauly
in Newsweek, June 29, 1987; "Loose Lending," by Leonard M. Apcar in
The Wall Street journal, July 13, 1987 (Sunbelt paid fees illegally); "The
Speaker and the Sleazy Banker," by William M. Adler with Michael
Binstein, Banker's Monthly, March and May 1988 (includes Wright's
reply); numerous stories in the National Thrift News; BusinessWeek,
Oct. 31, 1988.

Dixon bankruptcy: 387-33941-M-l 1, U.S. Bankruptcy Court, Dallas.

Dallas task force probe and subpoena list: Dallas Times Herald, Aug. 16 and
27, 1987, stories by Steve Klinkerman.

Conditions in Houston: Numerous articles in the Houston Post, by Pete Brewton,
specifically the article that appeared Aug. 18, 1987, by Gregory Seay and
Brewton.

Chapters 20-22

Herman K. Beebe: Numerous stories in the Shreveport Times, by Larry Burton,
Jane M. Allison, Charles Cornett, and especially Linda Farrar, 1984-88;
numerous stories in the Houston Post by Pete Brewton, especially Feb. 11,
March 13, and May 3-4, 1988; "Lone Stars Fall in Texas," by Bill Powell
and Daniel Pedersen, Newsweek, June 20, 1988; the FSLIC vs. Laurence B.
Vineyard, Jr., CA5-87-124, in the U.S. District Court for the Northern
District of Texas, Lubbock Division; U.S.A. vs. Herman K. Beebe, Sr.,
CR 3-88-124-D, in the U.S. District Court for the Northern District of
Texas, Dallas Division; U.S.A. vs. Herman K. Beebe, Sr., CR 87-50015,
U.S. District Court, Western District of Louisiana, Lafayette-Opelousas
Division.

Edwin Edwards: Newsweek article by Daniel Pedersen, Oct. 26, 1987; The
Almanac of American Politics, published by The National Journal, 1986
and 1988; Mafia Kingfish, by John H. Davis, McGraw-Hill Publishing
Co., 1989.

Continental Savings and Carlos Marcello: Affidavit filed in state district court
in Houston by Dr. James Fairleigh as reported by Pete Brewton in the
Houston Post, March 13, 1988.

Carlos Marcello: Mafia Kingfish, by John H. Davis, McGraw-Hill Publishing
Co., 1989.

424 ■ Source Notes

Hearings held in San Antonio, Texas, Nov. 20 and Dec. 1, 1976, before the
Subcommittee on Financial Institutions Supervision, Regulation and In-
surance to investigate the closing of Citizens State Bank in Carrizo Springs,
Texas, H241-10, and appendices, H24I-11.

George Aubin: "How Hutton Took a Texas-sized Bath," by Brian O'Reilly in
Fortune magazine, Oct. 13, 1986.

Memorandum prepared for the Comptroller of the Currency, June 3, 1985, by
Robert V. Ahrens, Ralph E. Sharpe, and Robert M. Krasne; memorandum
prepared for the Enforcement Review Committee of the Comptroller of the
Currency by Robert Krasne, March 4, 1985; memorandum prepared for
Deborah S. Hechinger, director of the Securities and Corporate Practices
Division of the Comptroller of the Currency, by Robert Krasne, April 16,
1985.

Southmark Corporation: Phil Hevener column in the Las Vegas Sun, Jan. 16,
1986, and story by Phil Hevener and Jeffrey M. German, Feb. 7, 1986;
articles in the Las Vegas Review-Journal, April 2, May 7, May 8, Sept. 29,
Nov. 6, all 1986, and Oct. 2, 1987; articles in The Wall Street Journal,
July 8, 1986, Sept. 19, 1986, Sept. II, 1987, Feb. II, 1988, Nov. 14,
1988; Houston Post story by Pete Brewton and Gregory Seay, April 10,
1988, and by Seay, April 19, 1988; Barron's, April 18, 1988; San Francisco
Chronicle, Sept. 8, 1988; The New York Times News Service story by Nina
Andrews, Sept. 7, 1988; Reno Gazette-Journal, Aug. 8, 1986, Oct. 6,
1988; Real Estate Securities Review, Oct. 7, 1988; Thomas C. Hayes story
for The New York Times, Oct. 17, 1988; San Jacinto Savings Association
and Subsidiaries Consolidated Statements of Financial Condition, June 30,
1984, and June 30, 1985; story for Forbes magazine by Howard Rudnitsky
and Matthew Schifrin, March 7, 1988; BusinessWeek story by Todd Mason,
May 19, 1986; transcript of hearings before the Nevada State Gaming
Control Board, Nov. 5, 1986; Southmark Corp. Form 10-Ks for fiscal years
ended June 30, 1985, and June 20, 1987.

Drexel Burnham Lambert, Inc., and Michael Milken: Wall Street Journal stories
by James B. Stewart and Daniel Hertzberg, Sept. 8, 1988.

George I. Benny: San Francisco Chronicle stories on April 16, 1986, and July
14, 1987.

North Mississippi Savings: Mario Renda's desk diaries; U.S.A. vs. John R. Swaim
84-4583, U.S. District Court for the Northern District of Mississippi.

George Wayne Reeder: Knoxville Journal series by Joe Krakoviak, Aug. 19-21,
1985; numerous articles by Sanford Nax in the Desert Sun, 1985—88;

Source Notes ■ 425

depositions of G. Wayne Reeder and John Patrick McGuire in case of John
Patrick McGuire vs. Wayne George Reeder, et al, 86-0663-CV-W-?, in
the U.S. District Gourt for the Western District of Missouri; Hill Top
Developers, hic, consolidated financial statements of May 31, 1983; Aug.
7, 1987, story in the Los Angeles Times; May 2, 1986, story in the Los
Angeles Times by Bill Ritter.

Acadia Savings: The FSLIC vs. Edmund M. Reggie, et al, GV88-2013, U.S.
District Gourt, Western District of Louisiana, Lafayette-Opelousas Division;
the Times-Picayune stories by Mark Schleifstein, Oct. 16 and 19, 1988; the
Baton Rouge Advocate story by Bruce Schultz, Aug. 28, 1988; the FDIC
vs. John Antonio, et al, 85-G-1298, U.S. District Court for the District of
Golorado; FDIG vs. Anthony Del Vecchio and Jilly Rizzo, 87-0626, U.S.
District Gourt, Pennsylvania.

John Gonnally, Jake Jacobsen, Mike Myers, Robert S. Strauss: San Diego Union
publication of a Reuters story on Aug. 9, 1987; Mother Jones cover story
by Kaye Northcott, Jan. 1980; several stories by Earl Golz in the Dallas
Morning News in 1971, 1973, 1974, 1979.

Ben Barnes: Several stories in the Dallas Morning News in 1971, 1975 by Earl
Golz.

Robert Strauss representing Jim Wright: New York Post, June 16, 1988.

Sig Kohnen worked for Strauss law firm: The Sunday Oklahoman "Mystery
Man" article by Glen Bayless of April 21, 1985; independently confirmed.

Chapters 23-25

Most of the material for these chapters comes from extensive interviews with
regulators and law-enforcement officials.

Lapaglia trip to Washington; To Kill an Eagle: The Dismantling of Gulf Federal
Savings Bank, by Thomas A. Kehoe, Sr., Harahan, Louisiana, 1988.

Frank Fahrenkopf, Wayne Newton, United Savings Bank, Buena Vista Bank &
Trust: Series by Julie Bird, beginning June 5, 1988, in the Golorado Springs
Gazette Telegraph.

The Federal Home Loan Bank Board, by Thomas Marvell, Praeger Publishers,
1969.

The U.S. League: Article by Monica Langley in The Wall Street Journal, July
16, 1986.

426 ■ Source Notes

Ed Gray: Article by Michael Binstein in Regardie's, Oct. 1988.

John M. Keilly: "Shenandoah Probe Widens," by Clyde Weiss in the Las Vegas
Review-Journal, Aug. 20, 1980.

Alan Greenspan letter: "Federal Fiasco," by Jeff Bailey and G. Christian Hill
in The Wall Street Journal, March 25, 1988.

"Consolidating the Administration and Enforcement of the Federal Securities
Laws within the Securities and Exchange Commission," report by the
Subcommittee on Oversight and Investigations of the House Committee
on Energy and Commerce, April 1987 (hearing on Beverly Hills Savings,
ESM Government Securities, Inc., Marvin Warner, American Savings and
Loan of Miami).

Charles Keating: Articles by Michael Binstein in Regardie's, July 1987, Arizona
Trend, Sept. 1987, and the Washington Post, May 1988; article by Andrew
Mollison in the Mesa Tributie, Dec. 28, 1986; articles by Bill Roberts,
Terry Smith, and Ben Winton in the Mesa Tribune, Dec. 29, 1986, and
Stephen Kleege of the National Thrift News.

Regulatory and law enforcement: "Report of the National Commission on Fraud-
ulent Financial Reporting (Treadway Commission)," Oct. 1987, presented
to House Committee on Energy and Commerce's Subcommittee on Over-
sight and Investigations; "Combatting fraud, abuse and misconduct in the
nation's financial institutions: current federal efforts are inadequate," sev-
enty-second report by the Committee on Government Operations, U.S.
House of Representatives, Oct. 13, 1988, House report 100-1088; T/ieWa//
Street Journal, "Review & Outlook," Sept. 21, 1988; "What's So Secret
About the Bank Secrecy Act?" by Margery Waxman and Linda Madrid in
Outlook of the Federal Home Loan Bank System, July/August 1986; San
Diego Tribune article by Michael Kinsman, Oct. 5, 1987; testimony of
Jeffrey J. Jamar and others before the U.S. House of Representatives Sub-
committee on Commerce, Consumer and Monetary Affairs, June 13, 1987;
several articles in the Washington Post by Kathleen Day in 1988; remarks
by William F. Weld, assistant attorney general, criminal division, to the
Fidelity and Surety Committee of the American Bar Association, Jan. 23,
1987; article by Seth Kantor for the Cox News Service as it appeared in the
San Francisco Banner Daily Journal, March 14, 1988; "Bank office and
director liability — regulatory actions," by Thomas P. Vartanian and Mi-
chael D. Schley in The Business Lawyer, May 1984.

Testimony that an FSLIC employee told defendant to "get dumb": U.S.A. vs.
Wayne Barnhart, CR 3-88-206-G, U.S. District Court for the Northern
District of Texas, Dallas Division.

Source Notes ■ 427

Danny Wall: Several Jack Anderson columns in 1988.

Fees to independent fee counsel: FHLBB Office of General Counsel Outside
Counsel Questionnaire Summary Compilation, April 22, 1988.

Banker's Monthly, May 1988.

Chapters 26 and 27

Teamster investments: President's Commission on Organized Crime.

Dr. John Nichols: The following stories in the Desert Sun: March 24, 1981, by
P. G. Torrez and John Hussar; Sept. 28, 1984, by Gale Holland; Oct. 3,
1984, by Gale Holland; March 21, 1985, by John Hussar; March 26, 1985,
by John Hussar; May 27, 1987, no byline; May 28, 1987, no byline; 1985
Annual Report to the California Legislature on Organized Crime in Cal-
ifornia by the State Department of Justice; March 30, 1988, story in the
Los Angeles Times by Kim Murphy.

McKinsey & Co. study that concluded the FHLBB search for merger partners
may cost the government as much as 40 percent more: As reported by
Nathaniel C. Nash for The New York Times News Service, Nov. 14, 1988.

Federal Reserve Bank solution: Article by William Greider in Rolling Stone,
Aug. 11, 1988; William Isaac in the Washington Post, Oct. 9, 1988.

FSLlCvs. David L. Butler, etal, 85-3845, U.S. District Court, Northern District
of California.

The Bankers, by Martin Mayer, Ballantine Books, 1974.

Conditions of banks and the FDIC: Two articles in the National Thrift News,
Dec. 12, 1988.

Index

170

36?

Abscam sting, 165. 350

Acadia Savings and Loan, 247, 259-261, 503,

304, 347, 358, 362. 364
Accounting firms, 293-294, 324, 367-368
Accounting rules, 13, 29, 294. 319. 335. 366
Acquisition. Development, and Construction

Loans (ADCs). 183
Acquisition and Development Loans (ADLs), 183
Adams, |ames Ring, 366
Adams, )im, 258

Adjustable rate mortgages (ARMs), 324, 368
Advance-fee schemes, 43, 336
Aetna Life Insurance Company,
Air America, 89, 341
Aiuppa. Joe "loey Doves." 169
Aladdin Hotel and Casino. 250.
Ali, Muhammad, 150-151. 348
Alioto. loseph, 351
Alliance Federal Savings and Loan, 115, 158-

160, 304, 349, 362
Aloi, Vinnie, 131, 132, 134, 135
America First, 312
Amencan Banker, 88, 89, 103-104, 107, 111,

297, 303, 315, 343, 348
American Conhnental Corporation, 271, 272,

290, 292, 295, 296, 363
American Express, 1 1
American Pioneer Savings, 167
American Savings and Loan, 178, 200. 312. 352
AMI, Inc., 188-189, 231, 232, 235-237, 254,

260, 358
Beebe indictment and, 242, 243
effect of Beebe's legal problems on, 245
offices of, 241, 245, 250, 359
success of, 241-242
Anderson, Chester, 62-63
Anderson, Dale, 236, 253
Anderson, Jack. 277

Anderson. John B. 167-170, 225, 303, 361

purchase of Dunes Hotel and Casino, 168-
170, 173, 174, 350, 353

Southmark and, 248, 249, 250
Angotti. Ottavio A, 65, 66, 70-75, 98, 339,

340, 354
Annunzio, Frank, 225, 266-267, 357
Antonio, John, 347
Any Name, Inc.. 347
Appraisers. 304

regulahons affecting. 315. 323-524
Arab International Bank. 86
Arabras. Inc., 86
Arana, Raul. 305
Arizona. 20. 23
Arosco family. 1 59

Art collections of thrifts, 185, 221, 353, 356
Arthim, Raymond, 62, 63
A.skew, Dale, 169
Associated Press, 214, 363
Atkinson, Jack, 209, 220, 225, 227, 228
Atlanhc City Press. 178
Atlas Savings and Loan, 34, 45, 46
Aubin, George John. 359-360
Auditors, 293-294, 319, 324, 367-368

{See also Bank examiners)
Aurora Bank, 137, 302, 361

CIA and, 138

FDIC lawsuit in connection with. 137-138,
152. 259, 302. 347. 361
Axelrod. Paul, 43
Azima, Farhad, 89-91, 305, 341, 342

Bailey, George, 1 3
Baker, Bobby, 333
Baker, James, 180, 226, 296, 365

429

430 • Index

Bank examiners, 14, 195, 196, 209, 211, 223,
266, 267, 273, 307, 314, 368

ability to spot fraud, 307, 396

Beebe and, 244

bribery of, 277-278

at Consolidated Savings and Loan, 66, 71-73

at Indian Springs State Bank, 90-91, 99-100

at Lincoln Savings and Loan. 291-295, 366

salaries of, 198, 268, 269, 319, 334, 363

shortage of, 21. 23. 47. 126. 127. 183, 199,
267-270. 300. 315. 534

transfer of thrift examiners to district banb.
268-270. 317

at Vernon Savings and Loan, 221-222
Bank fraud legislation, 320
Bank of America, 54, 337
Bank of Honolulu, 107
Bank of Irvine, 123, 339
Bank of Northern California, 337, 338
Bank Secrecy Act, 128. 129. 346
Bankers. The (Mayer). 368
Banker's Monthly, 288
Banb, 334

brokered deposits and (see Brokered deposits)

deregulation, proposed, 7. 325-326. 368

failures, 306-308. 315. 366

money laundering through. 128, 347

regulation of, 9

secrecy laws, revision of, 320

(See also individual banks)
Barker, Tyrell. 187-191, 194, 210, 227. 228, 355

Beebe and, 189, 190, 236. 237. 239

described. 187-188

indictment of. 211

as owner of State Savings and Loan of

Lubbock. 186. 190-191. 199-201. 230

sentence received by. 330
Barnard. Doug, 105, 211. 344
Barnes, Ben, 203, 227, 228, 354

Beebe and, 232-234. 237. 359
Barone, William. 344
Barrack, Thomas. 82
Bartlett. Steve. 212
Bass Group, Robert, 312, 352, 367
Basto, Frankie "The Bear," 362
Bay State Gold Exchange, 44
Bavles, Fred, 254

Bazarian. Charles. 14. 66-71, 75. 339, 348, 350,
362, 365

Anderson and. 170. 354

connections of. 155. 164

Dixon and. 203-204. 220. 226. 227

Hellennan (Rapp) and, 148-150. 154-155

Justice Department case against. 150-151, 174.
220. 330

Schwab and. 164. 165. 166-167, 174

Shenkerand, 174-175, 303
Bazarian, Janice Lee, 67. 69-70
Beall. Gilbert. 259. 261. 361
"Beards." 156-157, 169
Bearer bonds, 112, 301. 344

Beaver Creek. Colo.. 193-194. 196
Beebe, Easter Bunny, 231, 242. 243

husband David, 243
Beebe, Herman, |r , 231, 242-243
Beebe, Herman K., 228, 230-262, 305, 319,
358, 362. 364
background of. 231
as bank owner. 231-233
Barker and. 189, 190, 236, 237, 239, 245
Barnes and. 232-234, 237, 253, 359
Cage and Blount's role in indicting, 231. 236,

240-246. 252-259
Comptroller Report on. 230. 245-246. 254,

358. 365, 375-590
credit life insurance business {see AMI. Inc )
Dixon and. 188-191. 194. 206. 230, 233, 236.

237, 239, 245
family of. 231. 242-243. 245
FDIC lawsuit against. 360
as financier of thrifts. 188-191, 230, 236
indictments and trials of, 242-244. 252-259,

281
Louisiana politicians and, 237-238
organized crime allegations and. 231, 232,

234, 237-238, 302-303, 358
political connections of, 232, 237-239, 245,

260
sentences received bv, 243, 252. 258, 261,
321, 329
Beebe. Mary. 231, 242, 244
Beebe. Pamela. 231. 242. 243
Beebe. Ruth Anastasia. 231, 242
Bell Savings and Loan, 322-323
Bella, Dave. 51

Ben Milam Savings and Loan. 207, 359
Benny. George. 360
Benston. George, 286
Beveridge. Owen. 138. 141. 150
Beverlv Hills Savings and Loan. 76. 270, 364
Binder, Richard, 43-45, 303, 336
Bird, Julie, 563
Black, Steve, 113, 344

Black. William. 223-224. 277, 291, 294, 316,
357
"the five senator meeting" transcript. 291. 293.
391-403
Blain. Spencer. 80. 317. 341
Blair. Edward. 51
Blakely, Raleigh. 187
Blank, Rome. Comisky & McCauley. 364
Bloomfield Savings and Loan. 174-175
Blount. Ellis, prosecution with Cage of Beebe,

241-259. 281
Bocuse. Paul. 195
Boesky. Ivan F.. 3. 136. 332. 352
Bohannan. Robin. 63
Bona. lack. 170-171. 173, 178. 303. 322. 329,

350-351
Bonanno crime family, 127, 302
Boreta, John, 361
Borg-Warner Acceptance Corporation, 70

Index ■ 431

Bosco, Douglas. ^8-39, 51-52. 266. 3?6
Bossier Bank & Trust, 231-232, 234, 235, 238,
241-245, 249
collapse of, 360
Boston Globe, 44. 303

Bowman. L. Linton. Ill, 208, 214, 228. 354-355
Boyer. Joe. 200. 281
Bradley Mortgage Company. 68-69
Breeden. Richard, 310
Brenner, Jack, 193, 204
Brewton, Pete, 236, 282, 359
Brill, Steven. 173. 301, 342
Brokered deposits, 18-19, 22, 77-83, 181-182,
263, 270
banks abusing, 343

Indian Springs State Bank, 92-94, 343
Penn Square Bank, 19. 77. 340
enormous growlh of, 105, 344
linked financing (see Linked financing)
normal percentage of thrift's deposits as, 337
regulations concerning, 19, 20. 77-78. 81.

105. 106, 126, 296, 344
thrifts abusing. 106. 152. 178, 268. 355-356
Centennial Savings and Loan. 27. 31-33.

49. 52. 79
Consolidated Savings and Loan. 65, 71, 79
Flushing Federal Savings and Loan, 141-
142, 145
(See also Deposit brokers)
Bronk, Eric, 79, 197, 350
Brookside Village project, 64
Brown, Edmund, Jr , 20, 335
Brown, Mitchell, 169, 228
Brownsfield Savings and Loan, 200
Brumbaugh, Dan, 271
Bryant, John, 212
Buena Vista Bank & Trust, 363
Bullhead City, Ariz . RV park, 265, 363
Bureau of Indian Affairs (BIA), 31-33, 123, 336
Bush, George. 250. 296. 310

thrift bailout plan. 4, 313-314, 316, 321
Bush. Neil. 3. 250. 278. 317, 332, 368
BusinessWeek. 20. 171. 247, 352, 353, 355
Bussell, David, notes of, 253. 257
"Bust-Out," 6
"Bustouts," 6, 7, 60. 107-108. 125, 150, 151.

306
Butcher, C. H , 276. 314, 361
Butcher, Jake, 276, 314, 361
Butler, David, 322-323
Butterfleld Savings and Loan, 76
Byrne, Christopher ("Kip"), 110-113

Caen, Herb, 29, 36
Cage, Joe, 326

prosecution of Beebe. 231, 236, 240-246,
252-259. 281

Reggie and. 259-261

Spence and, 255-257, 260
Caldwell. Lance. 200. 281

California:

deregulation of thrifts in, 20-23, 30, 61, 64,
75-76, 202

economy of, 76, 340

federally chartered thrifts in, 20, 21, 61, 75,
335

loans-to-one borrower regulation. 66, 71

regulation of thrifts in, 20-21, 315

thrifts' investment powers in, 352

{See also names of individual thrifts)
California Department of Savings and Loan, 20-

21, 25, 47
California League of Savings Associations, 21
California Savings and Loan Commission;

Crawford as commissioner, 23, 30, 274, 283,
315

Taggart as commissioner, 22, 25, 65, 75-76,
106, 197, 217, 352
Calvacca, Stephen, 150-151
Cannon, Howard, 301
Capitol Savings and Loan, 216, 356
Caplin and Drvsdale, 363
Cardascia, Carl, 139-146. 150. 152-153. 235
Carlsberg Management, 361
Camemolla, Angelo, 347
Carson, Robert, 132
Carson landfill, 65-66, 68, 72, 73, 339
Caruana. Salvatore M., 45. 44, 503
Caruso, Carl, 91
Casey, William, 305

Cash-for-trash transactions, 200, 248, 555
Casinos, 156-176, 232

licensing of. 156-157. 163, 165-166, 168-
170, 248, 349

Southmark, Beebe and, 246, 248-250, 560

thrift financing of, 157-170, 172-176, 250,
304

{See also names of individual casinos)
Castellano, Paul, 502

crime family of, 125
Castro, Jose Louis, 1 59
Cauble, Re.x, 245
CB Financial, 68. 148. 170. 197, 548, 550

collapse of, 69, 70

loans to Schwab, 164, 166-167

Vernon Savings and Loan and, 227, 554

{See also Bazarian, Charles)
Centennial Corporation, 55, 36
Centennial Savings and Loan, 5-7, 25-60, 76,
303, 332. 339. 552. 559

auditors and. 48. 49, 55^7

board of directors. 50. 56, 45-46, 49-50, 55,
56. 556

brokered deposits and, 27, 51-55, 49, 52, 79

Christmas party at, 25-26, 45

Hansen at \see Hansen, Erwin ("Erv")]

offices of, 35-37, 59

organized crime and, 39-45, 57, 59, 545, 346

political relationships of, 38-39, 51

regulators and. 47, 49-57, 59-60, 557, 558
Central Bank of Walnut Creek. 44

432 ■ Index

Central Intelligence Agency (CIA), 138, 304-
306, 346
Global International Airways and, 89, 90
money laundering by. 138, 347
Central National Bank of New York (CNBY), 125
Certificates of deposit (CDs), 65. 86. 146. 178.
345
brokered fiinds invested in, 18-19, 334
Chandler. Dean. 42. 43
Change in Control law, 334
Chapman. Abe ("the Trigger"), 163
Chapman, Jim, 195
Chicago Trifcune, 21. 196. 355
Chmn. W. Franklyn. 338
Christensen, Dr Duane, 22
Cirona, )im. 291. 294
Citizens Federal Savings and Loan. 59-60, 245.

338
Citizens State Bank, 234, 235, 307-309. 358
Civella, Carl, 91
Civella, Carmen, 91
Civella, Nick, 40, 169, 303

crime familv of, 88, 91. 100, 127, 303. 342
Clines. Thomas. 341, 342
Coast Savings and Loan. 200
Coelho, Tony. 123. 195, 196, 217, 222. 266,

360
Colombo crime family, 125, 127, 138, 302
Colorado Springs Gazette Telegraph, 265, 363
Columbus-Marin Savings and Loan. 34. 45, 56,

337
Columbus Savings and Loan, 34
Commercial real estate loans and investments:
money laundering and. 128
repossessions. 178. 352. 353
thrift deregulation and, 20. 41. 61. 183. 334.

338
(See also names of individual properties and
thrifts)
Commodore Savings and Loan. 194. 207. 350
Community Savings. 167

Comptroller of the currencv. 230. 247, 306, 313,
357
report on Beebe's influence over banks and
thrifts, 230, 245-246, 254, 357, 365,
375-390
Concordia Federal Savings, 167
Condor Development, 63
Congress, US:

House of Representatives, 289

Banking Committee, 296, 306-309. 313.

366
Committee on Energy and Commerce,
Subcommittee on Oversight and
Investigations, 270, 364
Committee on Govemment Operations, 306,

314, 366
Ethics Committee, 316
Senate, 289

Banking Committee, 264, 291, 294, 296,
313

Connally, John, 203, 227, 228, 286, 354, 358,

359
Connally, Mark, 271, 296
Connolly, Pat, 47, 338, 339
Consolidated Savings and Loan, 64-66, 70, 76,

79, 98, 123, 350, 351, 354
casino loans, 172
regulators and. 70-75, 274
Continental Illinois National Bank and Trust

Company, 181, 325, 340, 343. 368
Continental Savings and Loan, 207, 210, 234,

250, 355
Beebe and, 235. 245. 250. 253
failure of. 234. 360
Contras. funds to the, 138. 304-306
Co-op Investment Bank, Inc., 145, 146
Cooper, Ernie, 57
Coronado Air. Inc.. 196
Coronado Savings and Loan. 99. 102. 108. 114.

118-120. 344
Cortez, Polly. 73
Cranston. Alan. 290
Crawford. William, 23, 30, 274, 283, 315. 319,

323
Credit unions. 333
CreditBank Savings. 214-215, 359
Crivellone, Donald, 350
Crocker Bank, 170
Crossland Savings, 167
Crystal Bay Club Cal-Neva, 157
Crystal Palace, 157-159, 349
Cuomo, Andrew, 3, 332
Curlee, Dunvard, 225, 335

as thrift lobbyist. 20. 195. 263. 264, 286, 363
Cuyahoga Wrecking Company, 161, 166, 167

D. J. Investments, 42

D'Agostino, Dominick, 40

Daily, Sam, 123, 330

linked-financing scheme and, 92-93, 97-101,
109-111, 118-120, 173, 343
letters to Winkler, 100-103, 115-118
prosecuhon of case against, 121, 122

Dalitz, Moe, 133, 170, 173, 235

Dallas Bank & Tmst, 233

Dallas Federal Home Loan Bank, 3

Dallas Life Foundation, 252

Dallas Morning News. 11, 233-234, 237, 238,
264, 302, 338, 341, 350, 353, 358-360

Dallas Times Herald. 228, 250

Damstraat company, 35

Davis. John H., 359

Davis. Sammy, Jr., 144, 207

Davis, William, 171

Day, Kathleen, 357, 366

Dav Realty and Day Escrow Company, 62-63

DeCarlo, Angel ("The Gyp"), 362

DeCarlo, Joe, 120, 122

DeCastro, Darrell, 73

DeConcini, Dennis, 290-294

DeLorean, John, 163

Index ■ 433

Delvecchio, Anthony, 303-304. 363
cases against, 150, 152, 259. 362
depositions of, 1 54, 347, 348
Hellerman (Rapp) and. 137, 138. 141-143.
145. 147. 150. 154
DeMaris, Ovid. 346

Deposit brokers. 18-19. 32-33, 41, 77. 96. 106
commissions of. 142-143. 340
publicity receiyed by. 96. 97
recommendations concerning. 318
{See also Brokered deposits; names of individual
brokers)
Depository Institutions Deregulation Committee.

78
Depository Institutions Deregulation and

Monetary Control Act. 11-12. 78, 236, 324
Deregulation of thrifts;

examination of what went wrong. 299-310
federal, 1-2. 11-14. 41. 84
state-chartered, 19-24, 352
(See also individual states)
(See also specific legislation)
Deukmejian, George. 22
DeVille Casino, 41, 157-161, 349
Dewey. Ballantine. Bushby. Palmer & Wood.

146
DiBiasi, Thomas. 40
Dierdorff. Daniel W., 173-174. 303
Dingell. lohn U . 270
Dioguardi. )ohn. 131. 132. 134-136, 351
Dixon, Dana, 184-185. 194-198. 203-206, 209,

221. 226-228
Dixon. Don. 184-199. 225. 228. 236. 288, 329
after leaving Vernon Savings, 220-221

bankruptcy, 226-227
background of. 184-189
Bazarian and. 203-204. 220, 226, 227
Beebeand, 188-191. 194, 206, 230. 236. 246,

356
FSLIC lawsuit against, 226, 289
Vernon Sayings and Loan and, 184, 185, 188-
199, 209, 210. 216, 230. 266, 356, 365
Dallas FHLB and, 208-209
Dixon "business expenses," 184-185, 193-

197, 202-206, 353
loans to Dixon subsidiaries, 192-193, 199
purchase of, 188-192
resignation of, 210-211
Doe, Samuel, 90
Doe Valley. Inc.. 200-201
Dolwig, Richard, 43-44, 336
Domingues, Frank J.. 170-171. 225. 322. 329.

350-352
Dondi Construction. 187
Dondi Financial Corporation, 192, 193, 197.

198, 220
Dondi Residential Properties, Inc., 209
Donnellan, Andrew. 147
Dorfman. Alan. 501, 303. 348. 351
Dorfman. Paul ("Red"). 351
Double Diamond A Ranch, 250

Downing. Chuck. 100

Drexel Burnham Lambert. 176, 247-248, 332,

348, 351. 352. 361
Drug Enforcement Administration (DEA). 163
Dunes Hotel and Casino;

m Atlantic City. N.J., 171, 173, 178

in Las Vegas, Nev., 39, 70, 91, 123, 165, 173,
206, 250, 342, 349. 361

Anderson's purchase of. 168-170, 173. 174.
350. 353-354

Teamster pension fund loans to, 173
Dunes Hotel and Casinos company, 172, 178
Duque family. 1 59
Duyalier. Baby Doc. 305
Dzivi. Bartly A.. 73

E. F. Hutton. 359

Eagen. Monsignor 1. Brent. 205. 354

East Texas State Bank. 157-158

Edwards. Edwin, 203. 237-239. 262. 302-303,

362
Egyptian American Transport Service Corporation

(EATSCO), 341
Ely, Bert, 367
Empire Savings and Loan, 3-4, 13, 21, 23, 80.

177. 201. 317. 341, 354
Environmental Protection Agency (EPA), 167,

350
Equity-risk regulations, 290
ESM Securities. Inc., 337
Esquire, 255
Eureka Federal Savings and Loan, 163, 167,

169-170, 200. 349. 351. 353-354
casino-financing loans, 162, 165-170, 250
sale of, 312

Fahrenkopf, Frank, Jr , 264-265, 363
Fairbanks, Ann, 271

Falcon Financial Corporation, 41. 158. 263
Farrar, Linda, 244. 252
Farrell, Harold. 152, 348
Fassoulis, Satiris Galahad ("Sonny"), 362
Faulkner, D. L. 341

FCA (see Financial Corporation of America)
Federal Bureau of Inveshgation (FBI). 40, 1 1 3,
306, 324. 343. 351
BRILAB investigation. 358
checks on prospective thrift owners. 64-65
Hellerman and. 131. 146, 147
investigation of Gray, 17. 106-107
investigation of thrifts. 6. 23, 61. 282
Centennial Savings and Loan. 37. 39, 50,

53. 59
Flushing Federal Savings and Loan. 246
Kidwell and. 163
lack of cooperation between regulators and,

275-282
Teamsters and, 172-173
thrift closings and, 73-75
understaffing of, 274-275

434 ■ Index

Federal Deposit Insurance Corporation (FDIC),

88. 332, 364. 368
Aurora Bank defendants and. 152. 259. 302.

347, 362
Beebe and. 246. 360
brokered deposits and. 19. 77. 78, 105, 334,

342
Bush thrift bailout plan and, 313-314
creation of. 333

Indian Springs State Bank and. 98. 102, 108
lawsuit against Renda and associates, 118,

119, 120. 122. 345
Manning investigation. 108. 113. 344
lack of cooperation with the FBI, 276. 281
Federal Home Loan Bank Act, 9
Federal Home Loan Bank Board (FHLBB). 7, 15,
26, 65, 75, 159, 169, 308, 333, 352
ARMs and, 324, 368
audits required by, 48
Bank Secrecy Act enforcement, 129
brokered deposits and. 18-19, 77-78, 84. 105.

126
Bush thrift bailout plan and, 313, 316
Change in Control law and, 334
creation of, 9
Ferrante and, 73

Gray's chairmanship of {see Gray, Edwin)
Gray's successor at {see Wall, Danny)
investigation of linked-tinancing deals, 107
1-30 condo loans and, 80-81, 304. 341
lack of cooperation with Justice Department,

277, 279
new members of, 286-287, 289, 365
political composition of, 17, 316-317, 334
recommended changes, 316-317
reserve requirements. 164. 315. 318. 350
role of. 332

sale of ailing thrifts by. 312-313. 367
Southwest Plan. 277, 313, 364
Texas thrifts and, 211-219, 225, 356
Federal home loan banks (FHLBs), regional,
9-10, 199, 363
Angotti and, 70, 340
in Dallas. 208-209. 211-219, 222-225, 278,

289, 556
Ferrante and, 72
lack of cooperation with Justice Department,

277. 279
in New York, 140, 146, 213
in San Francisco, 47, 65, 70. 72. 177. 278,
279, 309, 316, 340
Lincoln Savings and Loan and, 290-295.
317. 366. 591-404
in Seattle, 565

inTopeb, 175, 280, 317, 367
transfer of examiners jurisdiction of, 268-269,

317
in Washington, 295-296
Federal Home Loan Mortgage Corporation. 352
Federal Reserve Board. 266. 326, 354, 548

Federal Reserve System, 9, 553
Federal Savings and Loan Insurance Corporation
(FSLIC), 14, 15, 224, 225, 517. 544, 552,
564
Beebe and. 246. 247. 254. 255
closing of thrifts by. 51. 75. 74. 102. 147, 201,

557, 550, 566
cost of thrift crisis to, 4, 297, 298, 506, 509-

511, 526, 365
creation of, 10
depletion of, 270
determination of losses on a thrift failure, 75,

540
fundmgof, 10, 511-312. 564
insurance of thrifts by. 4. 10, 15, 19. 21. 86,
178, 201. 552. 555. 565
approval of new thrifts. 62. 64, 65
of brokered deposits, 77-78. 81, 105-106,

126, 344
maximum amount of insured deposits, 10,

II, 20, 84, 95, 555
recommendations, 517-518
risk-based premiums for, 181
investigations by, 41. 102. 108. 147

of Centennial Savings and Loan, 64, 69
of Consolidated Savings and Loan, 64, 69
of Vernon Savings and Loan, 195, 197, 221,
226
Joint Current Resolution and, 12. 534
lack of cooperation with Justice Department,

278, 281, 564
lawsuits against the. 72. 75
lawsuits against law firms advising thrifts, 364
membership. 19, 355, 335
process servers, 70
profiles of failed thrifts, 306
prosecution of thrift and bank cases bv. 56,
200, 220-221, 522-525
Acadia Savings and Loan, 247, 258, 261
Consolidated Savings and Loan, 75
fee counsel for, 280, 564
Flushing Federal Savings and Loan, 150
suit against Renda and associates, 117. 118, 545
recapitalization bill, 215, 214, 217-218, 225,
226, 285-289, 500, 516, 525, 555, 565
forbearance provision, 289, 566
passage of, 296-298
regulations of, 13, 334
sale of ailing thrifts and, 512-315, 368
Ferrante, Robert, 61-66, 69, 71-75, 125, 197,
227, 529, 540, 551, 555
Bazarian and, 66, 68, 69
Renda and, 98, 125, 172, 545
Southmark and, 248. 250
Fidelity Savings and Loan. 200
Figge. Fred. 122
Fihn. Jay. 91
Filante. Bill, 555

Financial Corporation of America (FCA), 178-
182, 211, 267, 303, 312, 555

Index ■ 435

Financial Security Savings, 3

First American Bank and Trust, 167, 350

First American Savings and Loan, 3

First Atlantic Investment Corporation Securities

(FAIC), 106
First Bank & Trust Company. 144-145
First Cayman Bank, 23

First Federated Savings and Loan. 165, 167, ?50
First National Bank of Marin, 169, ?50
First United Fund, 65, 85, 96, 105, 141, 254
321, 344

documents from, 112

evidence found in search at, 113-119, 149

negative stories affecting, 103-104, 107

offices of. 197. 103

Renda's running of {see Renda. Mario)

start of, 86, 87
FirstSouth Savings, 366
Fitzmorris. James, 238
Florida, 20, 23, 76
Florida Center Bank. 148-151, 153. 154, 220,

348
Flushing Federal Savings and Loan, 130, 137,
139-147, 234, 302. 303. 362

CIA and. 138

linked financing at. 141-146

regulators and. 140. 145-147. 151-153
Fong. Hiram. 132
Forbearance, 289, 315, 366
Forfees, 247

Ford, Gerald, 144. 196
Forde. Ed. 21

Formato. Lorenzo. 141, 150. 152. 347. 362
Fortune. 85. 86. 359. 361

Fountain Pen Conspiracy (Kwitny). 138. 260, 362
Franks, Jack, 204, 221, 225-228. 331. 554-356
Fratianno. Jimmy ("the Weasel"). 43. 133, 303,

336. 348
Fraust. Bart. 103
Freedom of Information Act. 55
Freedom Savings and Loan. 166. 167. 174. 339.

350
Fricker. Mary. 5-8. 60. 261
Friedman. William. 247-249. 251
Frost, Martin, 212

Cadbois, Richard, Jr . 73-74
Gambino. Carlo, 232

crime family of, 125. 127. 302. 358
Gam. Jake. 211. 264. 309
Garn-St Germain Act, 19. 175. 296. 300. 308.
334
key elements of. 12. 352
signing of. 1-2. 12. 16. 301
Gaubert, Tom, 216-218, 225, 228, 266, 288,

307. 316. 329. 353. 357
General Accounting Office (GAO). 4. 289. 296.

306. 313. 332. 366
Genovese crime family. 127. 154. 302

George Ranch. 29, 30

Gessell, Gerhard, 106

Ciancana, Sam, 133

Giordano, Tony, 169

Giuliani. Rudolph. 167

Glass-Steagall Act. 325. 326. 368

Glen Grotto Inn. 142-143

Glenn, John, 290-294

Global International Airways. 89-91. 138. 305,

342
Glossary. 369-374
Golden Pacific Savings and Loan. 35. 39. 56. 61.

337. 338
Golz. Earl, 233, 234, 296
Gonzalez. Henry. 307. 309
Goodwill, valuation of, 294, 365
Gorwitz, Dave, 43-45. 303. 336
Gould. George. 297
Government Ethics Committee. 17
Graffagnino. Anthony J.. 238. 359
Gramm. Phil. 279
Grant. Alexander. 48. 337
Gravel. Camille. 242-244
Gravlee. Martha, 64-65
Gray, Edwin. 15-19. 22, 177-184, 207-208,
211-219, 299-300, 337
attempts to oust, 263-265, 270-273
becomes head of FHLBB, 15-18, 82, 263
brokered deposits and, 19, 22. 33. 77-83. 105-
106. 125-126, 181-182, 263. 268. 270.
296
Consolidated Savings and Loan and. 72
Empire Savings and Loan abuses and. 3-4. 23.

80-81, 201
last months at FHLBB. 289-292. 296-298
limitations on annual thrift growth. 182-184.
202. 207, 263, 266, 270, 273. 315. 353
recapitalization of FSLIC. fight for, 213, 214,

217-218, 223, 285-289, 297-298
Regan and, 78, 79, 82, 181-182, 211, 272-

273, 286, 289, 344
regulation of direct investments, 181-184, 202,
207, 263, 266-267, 270, 273, 290, 291,
315, 352, 363
rumors about, 82, 105-107, 286
state-regulated thrifts and, 21, 24
thrift reserve requirements upped by, 164, 3|5
Wright and, 212-218, 222-225, 287-288,
297, 365
Gray, Monique, 16, 17, 272, 273
Great American First Savings Bank, 16, 335

Meese loans from, 81-82
Great Western Savings and Loan, 55, 337, 338,

368
Green, Roy, 208-209, 216, 222-225, 357. 365
Greenspan. Alan. 266. 326
Grell. Steven A.. 78
Grigsby. Mary, 3, 80, 271, 286
Grosz. Joe, 361
Gulf Federal Savings Bank. 264. 364

436 ■ Index

Hague, James D., 360

Haines. Beverly, 27-28. ?0. 36, 46-50, 52, 339-
340, 344

cooperation with investigators, 54-56

embezzlement charges against, 53-54

sentence received by, 59
Hall, Craig, 212-214, 228, 316, 356
Hansen, Erwin ("Erv"), 5-6, 26-39, 44, 53, 56-
57, 173, 266. 304

bonuses received by. 45

buving sprees of, 36-37, 46

death of. 57, 59, 328

embezzled funds, 55. 337

handling of regulators by, 47, 49-51

before joining Centennial, 26-27. 335

loans made to. 34. 35, 337. 338

management contracts. 45-46

removed from office. 51, 52

runnmg of Centennial Savings, 27-51, 339

suicide attempts. 55

threat on life of. 50
Hansen. Gavle. 26
Haralson, J B., 359
Harper. Richmond Chase. Sr. , 302. 358
Harris. Byron, 207, 227. 282. 354
Harris Trust and Savings. 167
Hartke, Vance. 349
Haynes. Richard ("Racehorse"), 242
Hellerman, Janet, 143
Hellerman, Mar>', 130-131, 136
Hellerman, Michael (renamed Michael Rapp),
130-155, 302, 303

background of, 132-135

Bazarian and, 148-150, 154-155

Flushing Federal Savings and Loan and, 139-
147, 150. 151. 302

Justice Department prosecution of. 150-151

mob warning to. 130-131. 135

new identity of, 135-136

in prison. 153-154

sentence received by. 330

as stockbroker. 132-134

to the mob. 131-132. 134-135

testimony against the mob, 131, 135, 136

Wall Street Swindler (see Wall Street Swindler)
Henkel, Ue, 286-287, 289
Henrickson, William Olof, 58
High Spirits, 194-195. 197. 202. 353
Hill. John v.. 204. 354
Hilton Head Island. 166

Hoffa. Jimmy. 39. 91, 172, 173, 301, 342, 348
Holiday Casino. 40
Holiday Inns. 234, 236, 358
Home loans. 10, 79, 183, 290, 311. 318-319.

334. 364
Home Savings and Loan. 159, 160, 349
Homestead Savings and Loan, 339
Hoover. Herbert. 9
Hopkins, E. Morton, 194, 228, 350
Horner, Connie, 268-269

Houston Post. 209-210, 236, 282. 344, 355, 358

Hovde, Donald I.. 3. 80. 212. 286

Hunt. Caroline. 313

Hunt brothers, 248, 313, 368

Illinois, 20, 76

Independent American Savings Association, 207,

216. 217. 266. 316, 353, 355-356
Indian Springs State Bank, 88-94, 114, 303, 305,
345
closing of, 104, 108, 343
linked-financing scheme and, 92-94, 96-99,

102, 110, 173
prosecution of Renda and associates, 118, 120-

123
regulators and, 98-100, 102, 108, 118. 334
Internal Revenue Service (IRS), 87, 107. 175,
280, 342-344
First United Fund raid, 113
Schwab and, 161, 162, 165, 550
International Hotel, 157
lorizzo, Larry. 123-125. 302
IPAD (International Planners and Developers)

Construction Consortium, 84-86
Irving Savings and Loan, 160, 349
Isaac, William M,, 19. 77, 78, 105, 335, 344
Ivins. Molly, 228

Jacobsen. Jake. 358
Jason's, 186, 206

Jeffer, Mangels and Butler. 21. 335
Jenson. Norman B.. 39-43. 57-59, 68, 173.
303, 328-329, 346
casino financing deal and, 157-161, 304
Jezzeny. Fuad C. , 347
Jilly's Enterprises. 145, 347
Jiltone, 145

John Paul II. Pope, 184, 185, 205
Joint Current Resolution, 12, 334
Jones. Stuart. 278
Josephson, Michael, 327
Junk bonds, 176, 247-248, 348, 351, 360
Junot, Philippe, 195

Justice Department, 7, 15, 111, 289. 304, 308,
338. 356
Attorney General's Interagency Bank Fraud
Enforcement Working Group. 246. 276,
364
Bush plan funds for, 313, 321
FBI (see Federal Bureau of Investigation)
investigation of thrifts, 55, 227-228, 279-281
Lincoln Savings and Loan criminal referral,

293, 294, 295, 366
organized crime and, 132, 301, 345
prosecution of thrift cases, 150-151. 282-284,
332
secrecy of regulators as hindrance to, 275-
277

Index ■ 437

lustice Department iCont. ):
recommendations for changes at, 320-521
understaffing of, 274-275
U.S. attorneys' offices, 275, 281-28?, 321
{See also Organized Crime Strike Forces)

Kansas City Crime Commission, 88

Kansas City Star. 89, 341

Kansas City Times, 212

Kaplan, David, 43, 336

Keating, Charles, )r., 266. 271-272, 286, 294-

295, 317, 355, 363
Henkel and, 286-287, 289
political contributions by, 290, 291, 294, 295
senators defending Lincoln Savmgs, 290-294,
391-404
Keatmg, Charles, 111, 271
Keene, J. Ransdell, 258
Keilly, John, 265

Kelly, Carroll, 234, 245. 250. 355
Kemp, Jack. 196, 354
Kennedy, Edward, 238
Kennedy, John F., 238
Kersnar. Scott, 6
Kessler, Murray. 302. 358
Key Savings and Loan, 200, 227, 245, 253, 353.

355
Khashoggi. Adnan. 84-86, 123, 124, 207, 305,

341, 342, 344
Kidwell, Kenneth, 162-163, 167-169, 174, 303,

353. 363
King. Patrick C. 354
"Kissing the paper." 206, 354
Kleindienst, Richard G., 132
Klebmp. Donald, 272

Knapp. Charles, 178-181, 211, 329, 352. 355
Kohn, Aaron, 232
Kohnen, Sid, 164, 350, 365
Konigsberg, Harold ("Kayo"), 362
Kwitny, Jonathan, 138, 173, 260, 342, 362

Labor Department, 174, 301

La Costa. 94. 194, 235-236, 252, 253, 343, 359

Lakewood Enterprises, 28-30, 39, 42

Lakewood Hills, 58

Lamar Savings and Loan, 207, 210

Land flip, 46, 177, 207, 341, 355, 356

Langley, Monica. 273

Lapaglia. John, 41. 168, 254, 265, 361

attacks on Gray, 263-264. 300. 362

Jensonand. 68. 157-160. 304

Schwab and, 162. 353
Last Mafioso. The (DeMaris). 303. 346. 348
Las Vegas Hilton. 157
Las Vegas Holiday Casino, 1 57
Lave, Lester, 361

Law enforcement, recommended changes in,
320-322

Lawton Industries, 221

Uxalt, Paul, 196, 224

Uyne, Erwjn, 138-139, 141

Leach, Jim, 313, 335

League, Inc., 253

Lemaster, Everett, 88-91, 93, 98-102

death of. 101-102. 104. 117
Lemons. Woody. 193. 198, 226
Leon, Ed. 110
Lewis, Anthonv, 366
Liberia, 90

Liberty Federal Savings and Loan. 175. 360
Life, 172

Lincoln Savings and Loan, 266. 271. 272. 290-
296. 317

appraisal deficiencies. 292-294

criminal referral on. 293. 294. 296, 365

Henkel and, 286-287, 289

political intervention on behalf of, 290-294,
391-404
Lindner, Carl, 272
Ling, James, 248
Linked financing, 342

Hellerman (Rapp) and associates and, 141-146

Renda and associates and, 92-118, 124-125,
192. 342. 344
Litton Industries. 305. 366
Loan brokers, 41, 68, 204

commissions, 68, 339

{See also names of individual brokers)
Local Federal Savings and Loan, 149
Lodge, Bill, 238
Los Angeles Times, 63, 94
Louisiana. 20. 76

Beebe's operations in {see Beebe. Herman K. )

casino gambling plans for. 260. 361-362
Louisiana Bank & Trust. 259. 260
Lowery. Bill. 197

Lucchese family. 97. 112. 123. 125. 127. 154,
302. 344

members of. 131. 132. 302
Luce. Gordon. 82
Luken. Thomas A.. 270
Luna. Donald. 152. 235

MacAndrews and Forbes Holding. Inc.. 367
McBirney. Edwm T.. III. 216. 228. 329, 354,
361
as chairman of Sunbelt Savings, 2, 186, 206-
207
Beebe and. 206. 230. 245
resignation of. 211
parties given by. 2. 186, 206
McCain, John, 290-294
McCormack, John W., 132
McDermott. Roger, 39, 46. 50
Mack. John Paul. 222. 356-357
McKean. John. 82
McKenna. Connor and Cuneo, 270

438 ■ Index

McKigney, James, 238
McKinzie, Janet F., 22. 2?
McLean, Harvey D., 20. 245
McLin, Steve, 312
McNamar, R. T., 78-79
McNeely, Dave, 233, 234
McTague. Jim, 356
Maffeo, Bruce, 112, 113, 119, 321

case against Renda and Schwimmer, 120, 122-
123
Mafia Kmgfish (Davis), 359
Maher. Bishop Leo T , 184, 205, 354
Mainland Savings Association, 115, 345
Mainland Savings and Loan, 207, 210, 278
Mallick, George, 215, 223-224, 357, 365
Mallick, Michael, 223, 365
Mangano, Donald P., 23
Mangano & Sons Construction Company, 23
Mann, Scott. 214-215, 355
Manning, Michael, 109-120, 345
Manning Savings and Loan, 18, 19
Manzo, Frank, 302, 344
Marcello, Carlos, 127, 231, 232. 234, 258, 251,

302-303, 358
Marcello, Joseph, 238, 303
Marin Savings and Loan, 34
Martin, Roger, 294
Martorelli, Ronald. 347. 348

as Flushing Federal Savings loan officer. 140-
146

lawsuit against. 1 50
Mascolo, Frederick. 259, 362
Masegian, John, 22. 335
Maxim Hotel and Casino. 168, 169. 250. 349
Mayer, Martin, 368
MDC Holdings, Inc., 272, 361
Meese, Ed, 16, 246, 265, 283, 338, 353. 365

loans from Great Western First Savings. 81-82
Meet the Press. 294
Mercury Savings Association. 359
Mercury Savings and Loan. 207. 245
Merica. Ken, 152
Merrill Lvnch, II, 78, 80, 115, 181-182. 292.

341
Metropolitan Crime Commission, New Orleans,

La., 232
Metz, Steve, 138, 142, 143
Michigan, 20

Midland Savings and Loan, 207
Midwest Federal, 313
Milano gang, Peter, 127
Milken, Mike, 247, 332, 560
Miller, Sy, 85-86
Missouri, 20
Mitchell, Edson, 111, 80
Mitchell, Walter, Jr., 64, 98, 358
Miftlestet, Ed, 196
Mizel, Larry, 317, 361
Mmahat, John. 264. 265
Mmahat and Duffy. 364
Molinaro, John L. , 25. 357

Money laundering, 127-129, 138, 301, 303,

304, 346
Monev market fijnds, 11, 12, 355, 541
Moonlight Beach Club, 198
Moriarity, W. Patrick, 559
Moroney, James, 317, 368
Morrison Energy International, 42-43
Morrison, Hecker, Curtis, Kuder & Parrish, 108-

109, 120
Mortgage brokers, unregulated, 311, 366
Mortgage pullers, 342
Morvillo, Robert, 135, 136, 546
Moscotta, Phil ("Cigars"). 1 57
Mowbray. Kermit. 280-281. 517
Mowerv. Llewellvn, 172
Muolo.' Paul. 6. 60. 130. 155-154
Murphy. Pat. 57
Murrieta Hot Springs. 49-50
Musacchio. Ted, 558

Napoli. John. Jr.. 157. 259. 502. 547

National Bank of Bossier City, 258

National Council of Savings Institutions (NCSl),

79, 285
National Credit Union Share Insurance Fund,

335
National Thrift News. 6, 40, 41, 60, 157, 161,

181, 220, 272, 278, 286, 294, 332, 568
NBC-7V, 97
Needham, James, 275
Negrelli, Frank, 158
Nevada Gaming Control Board. 165. 165-166.

168-170. 248-249. 504. 550
Nevis. Tom. 200-201. 221. 225, 228, 256-257,

521, 554, 555. 559
indictment of, 551
Southmark and, 249, 250, 561
Nevis Industries, 200, 354
New Republic. The. 296, 506, 557
Newsweek, 217
Newton, Wayne, 67, 168, 224, 264-265, 549,

561-565
New York, 20, 76
New York Daily News. 146
New York Times. The. 94, 107, 179, 226, 560
Nichols, Dr. John, 505
Nolan, Pat, 21, 555
Nolan Bill, 21, 30
Noons, Philip, 278
Noons, Thomas, 278
North American Savings and Loan, 22-23, 76,

274, 364
North Carolina, 20
North Mississippi Savings and Loan, 254

O'Connell, William, 17, 81, 106, 182, 183, 267
Office of Government Ethics, 285
Office of Management and Budget (OMB), 180,
267-270, 300. 552. 565

Index • 439

Officers' and directors' insurance, i22

Ohio. 20. 76

Olano. Guv, 41, 158-160. 304, ?49, 362

Oldenburg, |. William, 168, 177. ?51

OPEC. 84. 541, 343

Operation Greenback, 129, 346

Orange County Register, 178. 29S

Organized Crime/Drug Enforccnient Task Force.

43, 57
Organized Crime Strike Forces, 283, 304. 322.
332, 337
in Brooklyn, 112, 120-123
in Kansas City, 110, 119, 120, 122
in Washington, 1 12
Organized crime and thrift industry. 6. 123-130.
137-155, 279, 300-304
Centennial Savings and Loan and, 39-45, 57,

59, 304
Consolidated Savings and Loan and, 73, 340
money laundering, 127-129, 301, 303, 304,

306
{See also names of individuals and crime
families)
O'Shea, James, 196
O'Shea, Kevin, 42
Oxford Provident Building Association, 9

Palace Hotel and Casino, 98, 123, 172, 249-250

Palestine Liberation Organization, 89

Palmer National Bank, 245

Paper, The. 38, 52

Paris, Bob (see Pelullo, Leonard)

Paris Savings and Loan. 20. 207, 220, 227, 245,

356
Participations, 34-35, 66. 209. 222, 339
Pastora. Eden. 305

Patriarca. Michael. 277. 291, 293-294
Patriarca family. 43
Patterson, Bill, 123
Peat, Marwick, Mitchell & Co., 48
Peckham, Robert, 59
Pelullo, Leonard, 171. 178, 352
Penn Square Bank, 19, 77. 96. 111. 123, 340,

343
Penthouse, 172, 173, 255, 343, 359
Peoples Bank. 141. 144, 147
Perkins. Marc, 149

Peters, |. M., construction company, 361
Phelan, Richard ).. 316
Phillips. Gene. 228, 247-251. 360
Phoenix Federal Savings and Loan, 339
Pierce. Sam. 224

Piga. Salvatore. 97, 103, 111. 112, 123, 302
Pilkington, John, 265
Piombo Construction Company, 58, 335
Piombo Corporation, 28, 39, 40, 48, 57, 355

Centennial's purchase of 30-33, 48

Centennial's sale of 50-51
Pistone, Joseph, 346

Pizzo, Steve, 5-8, 72, 157, 161, 340
thrift industry investigation, 6-8, 60

Centennial Savings and Loan and, 5-7, 30-
32, 39, 40-45, 47, 52. 57. 60, 337
Players Casino, 162, 165, 166, 349, 353
Pontchartrain State Bank, 238, 253
Popejoy, Bill, 180, 181, 352
Posen, Robert, 264
Posner, Victor, 352

Pratt. Richard, 17, 181-182, 324, 334, 368
Pratt Hotel Corporahon, 172, 249-250, 361
President's Commission on Organized Crime,

172, 173, 301, 303, 342, 345
Presser, Jackie, 163, 172-173
Prevot, Albert, 241-243
Principe, Thomas, 40
Prins, Curt, 557
Priolo, Paul, 21
Provident Bank. 272

Proxmire. William. 266. 282. 289. 291, 368
Pulver, Howard, 544
Pusey, Allen, 238, 358

RACE Airways, 542

Racketeering Influence and Corrupt Organization
Act (RICO), 521, 345

prosecutions under, 1 50
Raiden. Norman. 180. 269-271, 355
Raldon Homes, 187

Ramona Savings and Loan, 25, 76, 313, 557
Rapp, Janet (see Hellerman, Janet)
Rapp. Michael (see Hellerman, Michael)
Reagan, Nancy, 211, 242. 264, 287
Reagan, Ronald, 4, 240, 242

Gray and, 16, 17, 264, 265

thrift deregulation and, 1-2, 16, 96, 250, 301
Real estate loans;

commercial (see Commercial real estate loans
and investment)

home loans, 10, 79, 183, 291, 511, 318-319,
334, 364

not limited to local area. 15
Reeder. G. Wayne. 253. 505. 561. 566
Regan. Donald. 18. 552. 555, 565

brokered deposits and, 78, 96, 181-182

Gray and, 78, 79, 82, 181-182, 211, 272-
275, 286, 290, 544
Regency Hotel, 145. 548

Reggie, Edmund, 257-259, 247, 250, 303, 304,
562

Beebe and, 257-239, 245, 254, 255, 259. 359

Cage investigation of Acadia Savings and. 259-
261
Reggie, Harrington and Boswell, 364
Reifler, Lionel, 158, 141, 142. 146. 147, 260,

261, 305, 562
Renda, Antoinette, 108
Renda, Mario, 84-88, 255, 505, 550, 559

Centennial Savings and Loan and, 52, 55, 79

440 ■ Index

Renda. Mario (Cont.).

commissions of. 87. 342, 344

Congressional testimony of, 96, 105

Consolidated Savings and Loan and. 65. 79.
354

diaries of, 123, 125. 173. 300

Ferranteand. 98. 123. 172. 343

Hellerman (Rapp) and. 148-149. 150, 154-
155, 348

IPAD and. 84-86

Justice Department case against. 150-151

lawsuits against, 118-123. 345
DeCarlo testimony, 120-122
plea bargains, 121-123

lifestyle of, 87-88, 108

linked-financing operation, 92-103, 105, 107-
118, 124-125. 192. 342. 344

list of institutions affected by. 108, 114-115

mob connections, 123-126, 302, 303

other scams of, 108. 344

restitution of funds, 121, 345

sentence received by, 330

Southmark and, 248-249, 250
Renner, Thomas C , 1 36
Resorts International, 250, 362
Rexford State Bank, 107-108, 114. 119. 344
Rey. Werner K., 364
Richman, Tom. 38
Riddle, John, 220, 227, 228
Riegle, Don. 291-294

Right to Financial Privacy Act. 128. 275-277
Ringer. Richard. 103, 104
Rizzo. jilly, 133-134, 136-138, 142, 143, 144.
145, 147, 303-304, 361. 363

Bazarian and. 149

FDIC lawsuit against. 137-138, 259, 347, 361

Sinatra and, 133-134, 144, 303
Robinson, Peter, 54-56, 59, 339
Roemer, Charles, 238
Roselh, Johnny, 133, 346
Roth, William v.. 129
Royal Inn Hilton, 157
Royale Group Ltd., 171, 178
Rupp, Heinrich, 137, 138, 302, 305, 347
Rushville National Bank, 349
Russian River News. 5, 6, 30, 31, 38, 40
Russo, Anthony, 88. 100. 303. 362

Global International Airways and. 89. 90

Indian Springs State Bank and. 88-89. 92-93,
99-100. 104. 173

linked-financing arrangement and, 92-93, 99

organized crime connections, 88, 100, 303,
362
Russoniello, Joseph P.. 337

St Germain. Fernand. 80. 81, 96, 234, 267, 367,
368
1976 investigation of bank failures, 307-508
voted out of office. 308-309, 323

St. Louis Post Dispatch. 169

St. Petersburg Tim^s, 166

Salem, Hussein, 341

San Antonio Light, 279

Sanchez, Richard, 291-293

Sandia Savings and Loan, 194. 207. 353

San Diego Union, 171, 354

San Dieguito National Bank, 359

Sandmann, Nicholas, 29. 34-37. 46. 57

Sands Hotel and Casino, 159. 361

San Francisco Chronicle, 29

San Francisco Examiner, 177

San Jacinto Savings and Loan, 172, 247, 250,

251, 351. 361
San Marino Savings and Loan. 305. 364
failure of. 21. 76. 177. 322. 351. 361. 368
real estate loans made by. 170-171, 351
Renda and, 123, 170, 253-254
Savings Investment Service Corporation (Siscorp),

66, 68-70. 280. 339, 362
Savings Life Insurance Company, 231, 233
Savings and loans:

boards of directors of 306. 319. 336 (See also

individual thrifts)
brokered deposits (see Brokered deposits)
casino financing bv. 157-170, 172-176, 250,

304
collapse and closings of (see names of

individual institutions)
cures for crisis of, 31 1-324
deregulation of federal, 1-2. 11-14, 41. 84
deregulation of state-chartered. 19-24, 352

(See also individual states)
direct investments by. 352-353

limitations on. 181-184. 202. 207. 263.
266-267, 270. 273. 282. 290-292,
315, 352, 363
examination of reasons for deregulations'

failure, 299-310
executive salarv increases at, 309, 366
future for. 318-319, 367
growth rate limitations, 182-184, 202. 207.

209. 263. 266, 270, 273, 315, 353
history of 9-15
interest rate cap on deposits, 10-11, 84. 86.

333
liberal accounting rules of. 13. 29. 294. 319,

335, 365
limitations on loans made by, 34

loans-to-one-borrower, 66, 71, 91, 92, 98,

140, 164. 175. 336
organized crime and (see Organized crime

and thrift industry)
purpose of, 10

qualification for ownership of federally-
chartered, 12-13, 319, 334
regulation of (see individual regulatory

agencies)
reserve requirements, 164, 315, 318, 350
Schlichtman, James. 338

Index ■ 441

Schroeder, Kenneth. )r., 162
Schultz, Scott, 212-214
Schwab, Mary, 161-162, 165, 166
Schwab, Philip, 161-167, 174, 303, 304, 353
Schwimmer, Martin, 87, 112, 114, 125. 302,
343-345
prosecution of case against, 120-123, 345
Sears. Roebuck and Co. , 1 1
Seaside Ventures, 98, 123
Securities and Exchange Commission (SEC),
132-134, 178, 233, 347, 352
Beebeand, 251, 358
Keating and, 272
Securities Industry Association, 106
Seidman, L. William, 314. 335
Selby. loe, 208-209. 211. 212, 214. 215, 217-
219, 316, 356
meeting with Wright, 223-225, 365
threats to, 219
Senate (se« Congress, U.S., Senate)
Settle. |oe. 208

Shadow Financial Regulatory Committee. 314
Shah. Siddharth ("Sid"), 33, 39, 42-43, 55, 57,
304, 328, 336
as Centennial officer, 33, 40, 45, 304
indictment and investigation of 57-59
mushroom opcrahons. 46-47. 49, 352
organized crime connections, 39, 42-43, 57.

304. 336
Piombo stock. 28. 30, 33
real estate ventures, 28-30, 35-37, 39, 40, 42,

46
resignation from Centennial. 49-50
Shane. Leonard. 16
Sharp. Frank. 233. 358
Shaw, )ohn M., 258
Shea, Michael, 146
Shearer, Robert, 172

Sheetmetal Workers International Association,
Local 38 pension funds, 87, 114, 123,
343
prosecution of Renda and Schwimmer for
defrauding, 120-123
Shelluni, Bernie, 175

Shenandoah Hotel and Casino, 40, 1 57, 349
Shenker, Morris, 43, 165, 249, 265, 323
FCA loans to, 178
Hoffaand, 39, 91. 172. 303
inroads in thrift industry. 173-175, 303, 360
Kidwelland, 169
Renda and, 123
sale of the Dunes hotels, 168-169, 171, 173,

174, 250
as stockholder and chairman of Dunes Hotel,
39, 91, 93, 172-174, 342
Shepard, John, 349
Shreveporl Times, 235. 244-245, 258
Sierra Diversified Investments (SDI), 5 1
Silver, David, 368
Silver City Casino, 248

Silverado Savings and Loan. 3, 250, 272, 278,

317, 332, 361, 368
Sinatra, Frank, 133-134. 141, 142, 144, 147,

152, 167. 303, 362
Singlaub, John, 251
Sioux City Hilton, 200-201
Siscorp (see Savings Investment Service

Corporation)
60 Minutes. 306
Smaldone. Eugene, 169
Small Business Administration, 241-243
Smith, C. Arnholt, 359

Smith, William, 138, 142, 144, 148, 150, 348
Soderling, jay, 35, 56, 67, 329, 338
Soderling, Leif, 35, 56, 61, 329, 338
Sonoma Financial Corporahon, 33
South Bay Savings and Loan, 76. 171. 350
South Chicago Savings, 167
Southern Floridabanc Savings Association. 164-

167
Southmark, Inc., 172, 228, 246-251, 272, 303,

305, 351, 361
Southwest Savings Association, 313
Speakes, Larry, 82, 273
Spence, Gerry, 255-257, 260
Spikes, Sam, 211, 353
SSDF Federal Credit Union, 151
Stafford, Tom, 150
Stagg, Tom, 243, 244, 255-258
State Department, 89, 341
State regulation of savings and loans, 9, 14, 315,

334
after federal deregulation, 19-24
(See also individual states)
State Savings and Loan of Corvallis, 114, 170,

200, 221, 281, 353
State Savings and Loan of Lubbock, 209, 364
Barker as owner of. 186, 190-191. 199-201.

230. 354
Beebe and, 230. 245. 253, 254, 258
State Savings and Loan of Salt Lake City, 177,

351
Station House, 168
Steinberg, Stuart, 121
Stevenson, Michael, 58
Stevenson, Ronald (alias Ronald Miller). 57
Stewart, Rosemary, 216, 307
Stockman, David, 267, 352
Stockton Savings and Loan, 207
Stonehouse Partners, 36
Strachan, Stan, 6, 181
Strauss, Richard. 228. 365
Strauss. Robert. 228. 350. 365
Straw borrowers, 93-95. 97-100. 102, 118, 145,

200, 210, 254, 342, 345
depositions from, 109, 110
Strunk, Norman, 353
Sugarloaf Lodge, 197
Summit Savings and Loan, 207
Sun Bank, 151-152

442 ■ Index

Sun Savings, 173. 303

Sunbelt Life Insurance Company, 238

Sunbelt Savings and Loan. 70. 209. 227. 339.

361, 362. 365
Gaubert and. 216-217
McBimev as chairman of, 2. 186. 206-207

Beebe and. 206, 230, 245

resignation of, 211
Sundance Hotel, 170
Sunrise Savings. 364
Surrenda, 98

Susalla, Edward D. ("Fast Eddie"), 236, 343
Susalla, Scott, 236
Swiss International, 137
Symbolic Motors. 205. 221

Taggart. Lawrence W . 335. 355

as California Savings and Loan commissioner,
22, 25, 65. 75-76. 106. 196. 211. 352

as lobbyist. 202. 211-212. 355
Ta| Mahal casino, 250
Tanner, R, B . 186, 191-192, 227
Teamsters, T/ie (Brill), 173. 301. 342
Teamsters union. 131. 172-173, 303

pension funds, 87, 91, 115, 163, 173, 235,
265, 305, 343, 348
casinos financed by, 173, 301, 366
crackdown on mob's use of, 174, 301
prosecution of Renda and Schwimmer for
defrauding, 120-123
Texas, 23, 183-229. 261-263

deregulation of thrifts in, 20

economy of. 208. 212. 227. 299. 335

thrift growth in. 183-184

thrifts' investment powers in. 352

(See also individual Texas thrifts and Ihnft
operators)
Texas Business, 209
Texas League, 363
Texas Monthly, 187, 196, 206
Texas Observer, 253

Texas Savings and Loan League, 20, 341
Thornburgh. Richard. 283. 321
Thornton. Grant. 337
Thrifts (see Savmgs and loans)
Thunderbird Hotel. 157
TLC (Texas. Louisiana. California). 236
Topeka Federal Home Loan Bank. 280. 317
Tourine. Charles ("The Blade"). 362
Trafficante. Santo, 127. 232
Tramunti. Carmine. 132, 135, 302

crime family of, 302
Treasury Department. 181. 313
Treasury Hotel and Casino, 172, 349
Treen, David, 258
Troop, Glen, 11, 333
Tropicana Casino. 91
Tulsa Tribune. 1 50
Twamley. Sherry. 72

United Federal Savings and Loan, 66, 68, 69,

339
United Savings Bank, 265
U.S. League of Local Building and Loan

Associations, 9
U.S. League of Savings Associations. 9. 12. 15.
81. 286. 299. 309. 357. 366
Gray and. 16-17. 106, 263, 286, 364-566
FSLIC recapitalization bill, 285, 365
regulation of FHLBB and, 182, 183, 266
power of, II, 355
St Germain and, 508
Wall and, 296
United States National Bank of San Diego, 359
University of San Diego, 197
Uniwest Financial Corporation, 365
USA Today, 6
Uvalde Savings Association, 1 58

Valley Bank of Nevada, 170
Vanden Eynden, William )., 547
Vantage Petroleum Company, 124, 125
Vernon Savings and Loan, 245, 339, 351, 354,
359, 363

Anderson and, 170

Bazarian and, 70

Bean Program. 198. 221

Beebe's influence at, 245, 253, 359

brokered deposits at, 192, 205

closing of, 225-226

cost to FSLIC of, 364

Dixon's running of (see Dixon, Don)

opening of, 187, 191

political contributions and, 216-217, 556

regulators and, 198-199, 201, 209, 220-226,
556. 564

sale of. 567
Vemon Vest. 205
Vesco. Robert. 564
Vicious Circles (Kwitny). 542
Villard. Dr. Joseph. 254
Vineyard, Larrv, 190, 211, 226-228, 555, 355,

364
Virginia. 20
Volcker. Paul. 18. 80. 297. 554

Waggonner. [oseph D. . 560
Wagner, Rodney. 337
Walker, Dan. 3'. 552
Wall, Danny, 106, 264, 509

as chairman of FHLBB, 106, 264, 277, 279,
296, 297, 296, 306, 316, 565

Lincoln Savings and Loan and, 294-295
Wall Street loumal. The, 51, 94, 177, 195, 216-

217, 228, 247, 248, 272-275, 276, 286,

512, 354-355
Wall Street Swindler (HeWermm). 132, 135, 156.

159. 502. 505, 346-348, 352

Index • 443

Washington. 20
Washington Post. 106, 356
Washington Times, 224
Webster, judge, 75
Weld, William, 279. 365
West, Bruce, 220-221, 226, 227
Western Savings and Loan. 194. 210. 245. 360,
368

closing of, 212, 219
Western United National Bank, 1 5 1
Westwood Savings and Loan, 76, 115, 212, 355
WFAA-TV, 282, 300, 354, 359
Wheeler Dealers. 207
Wheeling and Dealing (Baker), 333
White, Lari7. 286
Wilentz familv, 362
Williams, Ray, 342
Wilson, Chuck, 194
Wilson, Edwin, 341
Wilson, Pete, 196
Winkler, Franklm, 123, 330

daily letters, 100-103, 116-118

files of, 113, 149

leaves the country, 118, 173. 342

linked-financing scheme and. 92-94, 97-101,
109-111, 118, 173, 342
Winkler, V. Leslie, 92, 94, 97, 124, 125, 330,
342

leaves the countr\-, 1 19, 345

Wise, David, 253

Wise, Michael, 317

Wise Guy (Pileggi), 34-1

Wolfe, Richard, 253, 361

Wolk. Robert, 152, 348

Wood, Harry, 250, 361

Woods. Jarrett. 194. 212. 219. 228. 245, 360

World Wide Ventures Corporation. 137. 140-

142. 152, 347, 362
Wright. Betty. 224

Wright. |im. 195. 196, 212-219, 266, 296, 355-
357

ethics probe report, 316

FSLIC recap bill and, 213, 214, 217-218,
223, 226, 285-289, 300, 316-323, 365

Gray and, 212-218, 222-225, 287-288, 297,
365
Wuensche. Edward. 260, 362
Wylie, David, 234, 250, 355
Wyoming, 335

Yarbrow. Al, 68-69, 200, 303, 353
Bazarian and, 170, 174, 204, 354

Zaccaro, John A., 348

Zicarelli, Joseph ("Bayonne |oe"). 362

(conlimied from front flap)

exclaimed, "My god, this is what I've
been waiting for all my life!" When his
thrift later crashed, he left behind a
multimillion-dollar tab for Uncle Sam.

Inside Job explains how these financial
rogues were given free rein to loot
America's vaults, and why few of them
will have to repay what they took, or
spend even a day in jail. The book also
exposes the obstructionist role played by
nationally prominent political figures
who were recipients of major campaign
contributions from crooked thrift owners.

Amazingly, while the $200 billion
savings and loan repair bill remains
unpaid. Congress marches blindly on
toward radical bank deregulation. Only
by forcing Washington to face up to what
has really happened to the thrift industry
can an even larger catastrophe in the bank-
ing industry be averted.

Three years in the writing, and
expanded right up to press time to include
late-breaking information, Inside Job will
change forever the way you view your con-
gressmen, your senators, and your bankers.

Stephen Pizzo is the West Coast corre-
spondent for the National Thrift News,
which has been described by USA Today
as "the bible of the thrift industry."

Mary FVicker is an editorial writer for
The Santa Rosa (California) Press Demo-
crat, a New York Times company.

Paul Muolo is an editor of the National
Thrift News in New York.

jackei design by Terrence Fehr

McGraw-Hill Publishing Company

11 West 19th Street

New York, New York 10011

Business/Current Affairs

Advance Praise for Inside Job:

''Inside Job is the All The President's Men of the savings and loan
crisis. The authors parachute the reader into the Washington back-
rooms and the corporate boardrooms where this dramatic plot
unfolds. Inside Job has set a new benchmark for financial reporting."

jack AiKk-i>oii.

Sxiulicatcd (ioiiiniiiist

ami Pulit/er Pri/e-w iiiiitr

''Inside Job is the disturbing tale of the biggest bank heist in history-
one that goes beyond the vaults of financial institutions and picks the
pocket of every American. Culprits include Congress, regulators,
lawyers, accountants, and the media, as well as a new generation of
rustlers, this time dressed in pinstripes."

( onyresMiian |iin itach.
House ( onimittcc on Bankint;. Kinaiice

and I rbaii Mlairs

"In the Reagan years, an incredible collection of scam artists, mobsters,
and corrupt bankers — with good friends in Washington — may have
pulled off the financial crime of the century Inside Job tells the
fascinating, riveting inside story of how America's S&Ls were looted
of billions of dollars."

Brian Koss and Ira Sihcnnan.

\\\{ \i us

"Keenly insightful and meticulously researched, Inside Job brings
into clear focus the pressing need for much higher standards for
parties empowered to make loans and investments with federally
insured deposits."

( alitornia Sa\inus and loan ( (nninissioncr

9 '780070"502307
ISBN D-D7-DSD53D-7